2014 - Fortescue Metals Group

Transcription

APPENDIX 4E
For the year ended 30 June 2014
This information should be read in conjunction with Fortescue’s Financial Report for the year ended 30 June 2014.
Name of entity
Fortescue Metals Group Limited
ABN
57 002 594 872
Results for announcement to the market
2013
2014Variance
US$m US$m%
Revenue from ordinary activities
up from 8,120
to 11,753
+45%
Profit from ordinary activities after tax attributable to members
up from 1,746
to 2,730
+56%
Net profit attributable to members
up from 1,746
to 2,730
+56%
Dividends
Amount per security
Franked amount
per security
Interim – ordinary
A$0.10
A$0.10
Final – ordinary
Previous corresponding period:
A$0.10
A$0.10
Financial year ended 30 June 2014:
Interim – ordinary
Final – ordinary Record date of final dividend
Payment date of final dividend
-
-
A$0.10
A$0.10
3 September 2014
3 October 2014
Dividend Reinvestment Plan
The Company operates a Dividend Reinvestment Plan (the Plan) which allows eligible shareholders to elect to invest dividends
in ordinary shares which rank equally with the ordinary shares of the Company. The allocation of price for shares under the
Plan will be calculated as the average of the daily volume weighted average market price of all Fortescue shares traded on the
Australian Securities Exchange during the period of ten trading days commencing on the second day after the record date of
3 September 2014, being 5 September 2014.
The last date for receipt of applications to participate in or to cease or vary participation in the Plan is by 5:00pm (WST) on
4 September 2014. The Directors have determined that no discount shall apply to the allocation price and the Plan will not be
underwritten. Shares to be allocated under the Plan will be acquired on market and transferred to participants on 3 October
2014. A broker will be engaged to assist in this process.
A copy of the Plan Rules is available at www.fmgl.com.au/Investors_and_Media.
Net tangible asset backing
Net tangible asset backing per ordinary shares: US$2.41 (previous corresponding period: US$1.69).
Previous corresponding period
The previous corresponding period is the 12 months ended 30 June 2014.
Audit
This report is based on financial statements which have been audited.
Commentary on results for the period
A commentary on the results for the period is contained within the full year presentation and the financial statements that
this announcement.
1accompany
I Fortescue Metals
Group Limited I Financial Report for the half year ended 31 December 2013
ASX ANNOUNCEMENT
20 August 2014
Record Net Profit of US$2.7 billion, up 57%
“Fortescue’s record net profit reflects an
Final fully franked dividend of A$0.10 per share
outstanding performance across all
Additional US$500 million debt repayment announced
areas of our operations. The accelerated
ramp up to 155 million tonnes per
annum in March and the sharp
HIGHLIGHTS
reduction in costs over FY14 are a tribute
Key performance measures
2014
US$m
2013
US$m
+/%
Revenue
11,753
8,120
+ 45
EBITDA1
5,636
3,575
+ 58
Profit before income tax
3,913
2,466
+ 59
Net profit after income tax
2,740
1,746
+ 57
Net cash flow from operating activities
6,248
3,004
+ 108
Basic earnings per share (US cents)
88.00
56.07
+ 57
Operating cash flow per share (US cents)
200.66
96.47
+ 108
(1)
T he reconciliation of EBITDA to the financial statements prepared under Australian accounting
standards is provided in the Annual report accompanying this announcement.
to everyone at Fortescue. We remain
steadfast in our commitment to debt
reduction, with another US$500 million
to be repaid in October 2014, taking
repayments to US$3.6 billion in less
than a year and moving us closer to our
gearing target of 40 per cent.”
Nev Power
Chief Executive Officer
• Record net profit of US$2.7 billion, an increase of 57 per cent, with EBITDA of US$5.6 billion and a doubling of
cashflow to US$6.2 billion.
• Record operational performance with 124.2 million tonnes (mt) shipped, 54 per cent greater than the prior
financial year.
• C1 costs decreased by 23 per cent to US$34/wmt, with total delivered costs, inclusive of shipping, royalties and
administration of US$52/wmt or US$56/t on a dry basis.
• Realised price for FY14 was US$106/dmt (2013: US$114/dmt), based on the 62 per cent Platts index of
US$123/dmt (2013: US$127/dmt).
• Cash on hand of US$2.4 billion and net debt of US$7.2 billion reflect continued strength of operational cash
flows, reduced capital expenditure and lower finance costs.
• Debt repayments of US$3.1 billion complete with an additional US$0.5 billion repayment of 2018 Senior
Unsecured Notes announced. Intention to repay an additional US$0.5 billion to US$1.0 billion during FY15.
• All 155mtpa expansion projects have been completed at a total cost of US$9.2 billion, US$92 per annual
production tonne.
• Operating cashflow increased 108 per cent to US$2.01 per share.
• Final FY14 dividend of A$0.10 per share bringing the full year dividend to A$0.20 per share.
ASX Announcement I Fortescue Metals Group Ltd I 1
EBITDA US$5.6 Billion
Fortescue’s investment in infrastructure, new mining
areas and efficiencies has reduced C1 costs from
US$48/wmt in FY12 to US$34/wmt in FY14 generating
in excess of US$2.0 billion of cost savings and avoidance.
With FY15 C1 guidance of US$31-32/wmt these savings
will increase to US$2.6 billion per annum.
EBITDA of US$5.6 billion was 58 per cent higher than the
prior year and reflects the successful expansion to 155mtpa
together with a focus on performance improvement across
the mines, rail and port infrastructure.
Total shipments increased by 54 per cent to 124.2mt,
generating operating revenues of US$11.8 billion,
a 45 per cent increase from prior year. The realised CFR
price for the financial year was US$106/dmt, based on
the 62 per cent Platts index of US$123/dmt, a realisation
of 86%.
Fortescue’s operational margins over the past five years
are set out in the chart below.
Cash flow
Cash flows from operations were US$6.2 billion, reflecting
increased production and lower operating costs. Included
in the operating cash flows are US$712 million receipts
from iron ore prepayments and a US$500 million port
access prepayment offset by US$150 million Federal
Government income tax payments and
US$717 million royalty payments to the Western
Australian State Government. An additional US$666 million
of FY14 income tax will be paid by December 2014.
C1 costs continued to trend lower, decreasing by
23 per cent to US$34/wmt for the year, as a result of:
•increased production from the lower cost Firetail and
Kings mines;
•improved product strategy through blending of low
impurity Chichester and higher grade Firetail ore,
lowering strip ratios at the Chichester Hub;
Operating cashflow per share increased by 108 per cent
to US200.66 cents per share.
• enhanced processing capability;
•performance improvements, operational efficiencies
and productivity; and
Capital expenditure decreased to US$1.9 billion
(2013: US$6.4 billion), as the 155mtpa expansion was
completed during the year. Approximately US$0.1 billion
of capital expenditure was deferred to FY15. Net investing
cash flows, inclusive of capital expenditure, proceeds from
the disposal of assets and contributions from joint venture
partners was US$1.4 billion (2013: US$6.2 billion).
• a lower Australian dollar.
Total delivered cost of Fortescue tonnes sold, inclusive of
state government royalties, shipping and administration
charges, was US$52/wmt (2013: US$62/wmt).
200
200
180
180
US $/wmt
140
$127
120
$100
100
80
60
40
20
0
160
$146
$127
$74
$65
$44
$64
$18
$22
$24
$34
$39
2H2010
1H2011
$19
$27
1H2010
$57
C1 Cost
$22
$110
$113
$96
$45
$20
$28
$18
$50
$48
$49
$50
2H2011
1H2012
2H2012
1H2013
Other operating cost
2 I Fortescue Metals Group Ltd I ASX Announcement
$22
140
$114
CFR operating margin
120
$85
$53
$60
80
$35
$18
$39
2H2013
100
60
$20
$16
40
$33
$34
20
1H2014
2H2014
62% Platts index (RHS)
0
62% Platts US$/dmt
160
Total shipments 124.2mt
54%
for the financial year
Financing cash flows of US$4.6 billion include early debt
repayments of US$3.1 billion, interest and finance costs paid
of US$0.9 billion and dividend payments of US$0.6 billion.
Total debt reduction of US$3.6 billion together with
the repricing of the senior secured credit facility will
deliver annualised interest savings in excess of
US$334 million.
Balance Sheet
Fortescue’s net debt position improved to US$7.2 billion
(2013: US$10.5 billion), including cash on hand of
US$2.4 billion and finance leases of US$0.3 billion.
Fortescue also intends to repay an additional US$0.5 billion
to US$1.0 billion during FY15, subject to the iron ore price
and other market factors, moving towards an initial gearing
target of 40 per cent.
Strong cash flows generated from record shipments and
lower operating costs, coupled with reduced capital
expenditure, allowed Fortescue to commence
its accelerated debt reduction program completing
US$3.1 billion of early debt repayments in FY14. An
additional US$500 million repayment of the 2018
Unsecured Notes has also been announced, payable in
October 2014.
The significant flexibility built in the debt profile facilitates
additional repayments, with in excess of 60 per cent of
debt available for voluntary repayment in advance of
maturity and at Fortescue’s option, as illustrated in the
chart below.
Dividend
The Board declared a A$0.10 per share final fully
franked dividend, bringing the full year dividend
for FY14 to A$0.20 per share, a dividend payout ratio
of 21 per cent.
Fortescue successfully repriced the senior secured credit
facility during FY14 reducing the margin by 1.5 per cent to
2.75 per cent and extending the maturity to 30 June 2019.
Total interest payable on this facility is based on LIBOR,
with a LIBOR floor of one per cent plus the margin, and is
currently 3.75 per cent.
Fortescue intends to move to a 30 to 40 per cent
dividend pay-out ratio once initial targeted gearing
levels are achieved.
5,000
4,913
Repayable at Fortescue’s option
4,500
4,000
US$m
3,500
3,000
Callable
in
April 2017
Callable
Callable at
in
Fortescue’s
April 2015
option
2,500
2,000
1,500
1,500
1,000
1,000
1,000
500
900
500
Callable in
November 2015
400
0
CY2014
CY2015
CY2016
Senior secured credit facility
CY2017
CY2018
CY2019
Senior unsecured notes
CY2020
CY2021
CY2022
Committed to be paid in October 2014
Fortescue continues to assess all possible opportunities to take advantage of the Company’s improved credit metrics and
flexible debt/capital structure. These include the optional repayment or re-financing of debt in advance of maturities.
ASX Announcement I Fortescue Metals Group Ltd I 3
C1 costs were
23%
“Fortescue’s operational performance
has provided the foundation to
commence our debt re-payment
strategy. Initial repayments of
Guidance
US$3.1 billion together with an
Fortescue expects to ship 155 to 160 million tonnes in
FY15 at a C1 cost of US$31 to US$32/wmt. The reduction
in C1 costs guidance reflects a full year of production from
the Kings Valley mine, improved processing capability,
operational efficiencies and innovations. These targets
remain sensitive to weather events and exchange rates.
Iron ore prices have stabilised over recent months
with spreads between the 62% Platts and 58% indices
narrowing as supply re-balances. As Fortescue transitions
to a product suite dominated by the high quality Fortescue
Blend and Kings CID products, realised iron ore prices are
expected to range between 85 and 90 per cent of the
62% Platts price index.
additional US$500 million, payable
in October 2014, reflect significant
steps towards achieving our initial
gearing target of 40 per cent.
We continue to assess all possible
opportunities to take advantage of
our flexible debt/capital structure and
improving credit metrics to strengthen
the balance sheet. This includes
further repayments and re-financing
Capital expenditure for FY15 is estimated at US$1.3 billion,
including approximately US$0.1 billion deferred from FY14.
In order to achieve the initial gearing target of 40 per cent,
further debt repayments of US$2.0 billion to
US$2.5 billion are expected to be executed over the next
18 to 24 months period. The exact timing of these
repayments depends on a number of factors, including the
iron ore price and the Australian dollar exchange rate.
well in advance of maturities.“
Stephen Pearce
Chief Financial Officer
Glossary
CFR
Cost and freight rate
dmt
Dry metric tonnes
wmt
Wet metric tonnes
NPAT
Net profit after income tax
FY
Full year
mtpa
Million tonnes per annum
C1Operating costs of mining, processing, rail and port. The
reconciliation of C1 to the amounts disclosed in the financial
statements prepared under the Australian accounting standards is
provided in the Annual report accompanying this announcement.
EBITDAEarnings before interest, taxes, depreciation and a
mortisation, calculated as profit before income tax adjusted
for depreciation and amortisation, asset write-offs, exploration,
development and other expenses, finance income and
expenses and gain or loss on refinancing.
The reconciliation of EBITDA to the amounts disclosed in
the financial statements prepared under the Australian
accounting standards is provided in the Annual report
accompanying this announcement.
Non-IFRS information included in this announcement has not been subject to audit.
Online www.fmgl.com.au
Twitter twitter.com/FortescueNews
Youtube www.youtube.com/user/FortescueMetalsGroup
4 I Fortescue Metals Group Ltd I ASX Announcement
THE PATHWAY FROM
CONSTRUCTION TO PRODUCTION
2003
The dream begins
2004
Cloudbreak identified
2005
S&P/ASX 200 index
2006
Port Hedland
groundbreaking
2009
27 million tonnes shipped
2010
Christmas Creek expanded
2011
Solomon construction begins
2012
57.5mt shipped
2013
Firetail opened at Solomon
2013
80.9mt shipped
2014
155mtpa sustainable
production
Fortescue Metals Group Limited I Annual Report 2014
2008
First ore on ship
2014
Kings Valley mine
opened at Solomon
ANNUAL FINANCIAL REPORT
ABN: 57 002 594 872
www.fmgl.com.au
@FortescueNews
FINANCIAL REPORT
CONTENTS
Directors’ report
1
2
Remuneration report
26
Auditor’s independence declaration
48
Independent Auditor’s report to the Members
49
Directors’ declaration
51
Financial statements
52
DIRECTORS’ REPORT
Directors’ report
Your Directors submit their report on the Fortescue
consolidated group, consisting of Fortescue Metals Group
Limited (the Company) and the entities that it controlled
during the financial year (the Group or Fortescue).
Directors
The Directors of the Company in office during the financial
year and until the date of this report are as follows
(Directors were in office for the entire period unless
otherwise stated).
2
FY14 BOARD MEMBERS
Andrew Forrest
Herb Elliott
Neville Power
Chairman
Non-Executive Director
Deputy Chairman
Executive Director
Graeme Rowley
Geoff Brayshaw
Owen Hegarty
Retired 13 November 2013
Cao Huiquan
Geoff Raby
Herbert Scruggs
Elizabeth Gaines
Peter Meurs
Executive Director
Sharon Warburton
Mark Barnaba
Mark Thomas
Company Secretary
DIRECTORS’ REPORT
Andrew Forrest
Mr Herb Elliott AC, MBE
Chairman, Non-Executive Director
Deputy Chairman, Non-Executive Director
Term of Office
Mr Forrest was appointed Chairman of the Company
in July 2003. He became Chief Executive Officer in 2005
and resumed non-executive responsibilities as Chairman
(elect) in July 2011.
Term of Office
Mr Elliott was appointed as a Non-Executive Director of the
Company in October 2003, Deputy Chairman in May 2005
and Chairman in March 2007. He retired as Chairman in
August 2011 and remains on the Board as Deputy Chairman
and Lead Independent Director.
Experience
Mr Forrest is Founder, Chairman and a member of the
Company’s Remuneration and Nomination Committee and
has led the company to its A$14 billion market capitalisation
as the fourth largest seaborne iron ore producer. Under
Mr Forrest, Fortescue has made significant investments in
the Australian resources sector of more than US$18 billion.
Mr Forrest is Founder and Chairman of Minderoo
Foundation, Australia’s largest philanthropic organisation,
which operates GenerationOne, The Australian Employment
Covenant and Walk Free, a global campaign to end modern
slavery. He is a Councillor of the Global Citizen Commission
which will report to the United Nations General Assembly
in 2016 on reforming the Universal Declaration of Human
Rights. In 2013, he was appointed by the Prime Minister
of Australia to Chair the Review of Indigenous Training
and Employment Programmes. He is Commonwealth
ambassador for employment and engagement with
disadvantaged communities and Chair of the Foundation of
the Art Gallery of Western Australia.
Experience
Mr Elliott is a member of the Remuneration and Nomination
Committee. He was a member of the Audit Committee until
he resigned from the committee in May 2011. Mr Elliott
has been Chairman of Telstra Foundation Ltd and is a former
Director of Ansell Ltd and Pacific Dunlop Ltd.
He was the Inaugural Chairman of the National Australia
Day Committee, a Commissioner of the Australian
Broadcasting Commission and Deputy Chairman of the
Australian Sport Commission. Mr Elliott was also a director
of the World Olympians Association. Previous executive
roles include President of PUMA North America. Mr Elliott is
a Doctor of the Queensland University of Technology.
Other current directorships (ASX listed entities)
Non-Executive Chairman of dorsaVi Ltd.
Former directorships in the last 3 years (ASX listed entities)
None.
An Adjunct Professor of the China Southern University and
a long standing Fellow of the Australian Institute of Mining
and Metallurgy, Mr Forrest is a leading representative of
and advocate for the resources sector globally. He is CoChairman of the Senior Business Leaders’ Forum, the leading
formal dialogue for China and Australia’s most senior
business leaders.
None.
Non-Executive Chairman of Poseidon Nickel Limited 2007 to
September 2013.
3
DIRECTORS’ REPORT
Mr Neville Power
Mr Peter Meurs
Chief Executive Officer, Executive Director
Executive Director
Term of Office
Mr Power was appointed Chief Executive Officer
in July 2011, after joining the Company in February of
that year, and joined the Board as an Executive Director
in September 2011.
Term of Office
Mr Meurs was appointed as an Executive Director of of
the Company in February 2013.
Experience
Mr Power has more than 30 years’ experience in the mining,
steel and construction industries and has a proven track
record in the delivery of major infrastructure projects,
contract mining and steel manufacturing and distribution.
As the CEO of Fortescue, Mr Power has presided over the
tripling of Fortescue’s iron ore production capacity to over
155 million tonnes per annum, establishing its position as
one of the world’s largest, low cost producers of iron ore.
4
He has long been a champion of Indigenous employment
and is playing a pivotal role in strengthening and extending
Fortescue’s work in developing Aboriginal businesses as
well as direct employment opportunities. Before joining
Fortescue, Mr Power was Chief Executive Australian
Operations for Thiess Pty Ltd, a wholly-owned subsidiary
of Leighton Holdings, where he was responsible for the
construction business with a turnover of $4 billion per
annum and 3,500 staff delivering some of Australia’s most
significant infrastructure projects.
Mr Power gained over 10 years’ experience in steel
manufacturing and distribution as Chief Executive of the
Reinforcing and Steel Products Division with the Smorgon
Steel Group, one of Australia’s largest and most successful
steel businesses.
He established his mining career with over 20 years’
experience in base metals, gold and coal mining and
mineral processing with Mount Isa Mines.
Mr Power has a Bachelor of Engineering and a Masters of
Business Administration (MBA). He maintains an active
interest in managing the family cattle property and is
an avid aviator, holding both helicopter and fixed wing
licenses with endorsements on a range of aircraft.
None.
None.
Experience
Mr Meurs is the Director Development for Fortescue.
His responsibilities span from exploration through studies
to delivery of major capital expansion projects. As part of
this he had direct responsibility for the recently completed
delivery of Fortescue’s 100mt expansion and development
of the plans for future developments.
Prior to Mr Meurs commencing with Fortescue in May 2010,
he held the position of Managing Director at
WorleyParsons. He was a key contributor to the growth
and development of WorleyParsons after joining the
company in 1988. During his time at WorleyParsons,
Peter functioned in project management and company
development roles including establishment of the
foundations of the process business, the establishment
and growth of alliance and integrated services contracts
in Hydrocarbons and Minerals & Metals and the
development of the New Zealand business.
Mr Meurs has a Bachelor Degree in Mechanical Engineering,
is a Fellow of the Institution of Engineers Australia and
is also a member of the Australian Institute of Company
Directors.
None.
None.
DIRECTORS’ REPORT
Mr Cao Huiquan
Term of Office
Mr Cao Huiquan joined the Board as a Non-Executive
Director in February 2012 as the nominated director on
Fortescue’s Board from Hunan Valin Iron and Steel Group
Company Ltd.
Experience
Mr Cao graduated from the Department of Physics,
Beijing University in 1988 and obtained his Master
Degree of Metal Physics from University of Science and
Technology Beijing in 1991. He was an on the job Ph.D.
of Engineering of Central Iron & Steel Research Institute,
and was enrolled in the EMBA programme, China Europe
International Business School in 2009. In 1991, he joined
Hunan Xiangtan Iron and Steel Co., Ltd and was appointed
as General Manager in 2003. In 2005, he was appointed
as General Manager of Hunan Valin Iron & Steel Co., Ltd
(formerly Hunan Valin Steel Tube & Wire Co., Ltd), and
then concurrently held the position of General Manager
of Lianyuan Iron and Steel Group Co., Ltd since 2010. He
is now the Chairman of Hunan Valin Iron and Steel Group
Co., Ltd, the Chairman and CEO of Valin Iron & Steel Co.,
Ltd and General Manager of Valin Xiangtan Iron & Steel
Group Co., Ltd.
None.
None.
Ms Elizabeth Gaines
Term of Office
Ms Gaines was appointed as a Non-Executive Director in
February 2013.
Experience
Ms Gaines is an Executive Director and the Chief Executive
Officer of Helloworld Limited. Prior to this, Ms Gaines was
the Chief Operating Officer & CFO of Helloworld Limited,
Chief Financial Officer of the Stella Group, Chief Finance
and Operations Director of UK-based Entertainment
Rights Plc and was previously Chief Executive Officer of
Heytesbury Pty Limited.
Ms Gaines has held senior treasury and finance roles at
BankWest in Australia and Kleinwort Benson in the UK
and qualified as a Chartered Accountant with Ernst &
Young. Ms Gaines is a member of the Institute of Chartered
Accountants in Australia and the Australian Institute of
Company Directors and holds a Bachelor of Commerce
degree and Master of Applied Finance degree. Ms Gaines
is a director of Mantra Group Limited and the Australian
Federation of Travel Agents Limited.
Executive Director of Helloworld Limited and NonExecutive Director of Mantra Group Limited.
None.
Mr Graeme Rowley AM
Term of Office
Mr Rowley was appointed as an Executive Director in
May 2003. Following his retirement from executive duties
with Fortescue, Mr Rowley again became a Non-Executive
Director of the Company in March 2010.
Experience
Mr Rowley was an executive with Rio Tinto plc and
previously held senior positions with Hamersley Iron and
Argyle Diamonds. Mr Rowley’s previous directorships
have included the Dampier Port Authority, the Pilbara
Development Commission, the Council for the West
Pilbara College of TAFE and the Western Australian State
Government’s Technical Advisory Council.
Mr Rowley is currently Chairman of the National Centre for
Excellence in Desalination and he is also a Non-Executive
Director of Admedus Ltd. Mr Rowley has extensive
experience in operational management of both iron ore
ship loading facilities and heavy haul railway within the
unique Pilbara environment.
Non-Executive Director of Admedus Ltd.
None.
5
DIRECTORS’ REPORT
Mr Herbert Scruggs
Term of Office
Mr Scruggs joined the Fortescue Board in August 2011 as a
Non-Executive Director.
6
Experience
Mr Scruggs is Managing Director of The Cynosure
Group, a U.S. based direct investment company. He is an
expert in corporate recoveries and step change business
improvement. A lawyer by training (BYU 1984), he has held
a number of corporate, government, and civic positions
including Chief of Staff to the Governor of Utah and
Chairman of the University of Utah Board of Trustees.
Mr Scruggs served on a number of boards of public as
well as privately held companies including American
Investment Bank, Barbados Light & Power, Deseret
Morning News, Empire Insurance, and MK Gold – including
service on multiple audit and executive committees.
Mr Scruggs served as CEO of Huntsman Financial
Corporation and previously worked as President of the
Leucadia Asset Management Group.
He was instrumental in Leucadia’s original decision to invest
alongside Andrew Forrest in Fortescue. From July 2011
through December 2012, he provided, among other
activities, management services to The Minderoo Group
and the Australian Children’s Trust, where he continues to
serve as a board member.
None.
Non-Executive Director, Poseidon Nickel Limited,
September 2012 to February 2014.
Mr Owen Hegarty
Term of Office
Mr Hegarty was appointed as a Non-Executive Director in
October 2008.
Experience
Owen Hegarty has some 40 years experience in the global
mining industry, including 25 years with the Rio Tinto
group where he was Managing Director of Rio Tinto Asia
and Managing Director of the Group’s Australian copper
and gold business.
He was the founder and CEO of the Oxiana Ltd Group (now
OZ Minerals Ltd), which grew from a small exploration
company to a multi-billion dollar Australia, Asia and Pacific
focused base and precious metals producer, developer and
explorer. Mr Hegarty was awarded the AusIMM Institute
Medal in 2006 and the G.J. Stokes Memorial Award in 2008
for his achievements in the mining industry. Mr Hegarty is
Executive Vice Chairman of Hong Kong listed G-Resources
Group Ltd, a gold mining company. He is also Chairman of
Tigers Realm Minerals Pty Ltd, a private Melbourne based
mining company and Chairman of EMR Capital, a private
equity investment manager focused on resources.
Mr Hegarty is a Director of the AusIMM and a member of a
number of Government and industry advisory groups.
Non-Executive Director of Tigers Realm Coal Limited and
Highfield Resources Limited.
None.
Dr Geoff Raby
Term of Office
Dr Raby was appointed as a Non-Executive Director in
August 2011.
Experience
Dr Geoff Raby was Australia’s Ambassador to the People’s
Republic of China (2007-2011). Prior to that, he was a
Deputy Secretary in the Department of Foreign Affairs and
Trade (DFAT). He has extensive experience in international
affairs and trade, having been Australia’s Ambassador to
the World Trade Organisation (1998-2001), Australia’s APEC
Ambassador (2003-2005), Head of DFAT’s Office of Trade
Negotiations and Head of the Trade Policy Issues Division
at the OECD, Paris. Between 1986 and 1991 he was Head of
the Economic Section at the Australian Embassy, Beijing.
He has been the Chair of DFAT’s Audit Committee and
served as an ex officio member of the Boards of Austrade
and EFIC (Export Finance and Insurance Corporation).
Non-Executive Director of Oceana Gold Corporation,
SmartTrans Holdings Limited, Yancoal Australia Limited
and iSentia Group Limited.
None.
DIRECTORS’ REPORT
Mr Mark Barnaba
Ms Sharon Warburton
Term of Office
Mr Barnaba was appointed as a Non-Executive Director in
February 2010.
Term of Office
Ms Warburton was appointed as a Non-Executive Director
in November 2013.
Experience
Mr Mark Barnaba is Chairman of the Audit and Risk
Management Committee and a member of the
Remuneration and Nomination Committee.
Experience
Ms Warburton is Executive Director of Strategy and
Finance with Brookfield Multiplex. Prior to this,
Ms Warburton was Chief Planning and Strategy Officer of
United Arab Emirates based company, ALDAR Properties
PJSC, and previously held a variety of senior executive
roles with Brookfield Multiplex including Group General
Manager, Mergers, Acquisitions and Operational Support
and Group General Manager, Strategy and Operations.
She is a Chartered Accountant and has held senior finance
roles at Citigroup and Rio Tinto. She is a member of the
Institute of Chartered Accountants in Australia and a
Graduate of the Australian Institute of Company Directors.
Mr Barnaba currently holds the position of Chairman
with Macquarie Bank Western Australia, Western Power,
Edge Employment Solutions (a disability employment
organization), and the University of Western Australia
Business School. He also serves as an Adjunct Professor
in Investment Banking and Finance and as a member of
the In The Zone Editorial Committee with the University
of Western Australia. Until recently, Mr Barnaba held the
position of co-founder and Executive Chairman of Azure
Capital and was a Non-Executive Chairman of the West
Coast Eagles Football Club and a member of the Rhodes
Scholarship Selection Committee.
Mr Barnaba received his Bachelor of Commerce with first
class honours from the University of Western Australia in
1985 and was awarded the JA Wood University Medal for
top graduate, university wide. He then went onto Harvard
Business School and received an MBA in 1988, graduating
with a high distinction as a Baker Scholar. In 2009,
Mr Barnaba was the recipient of the Western Australian
Citizen of the Year Award in Industry and Commerce.
None.
Adept Solutions Ltd.
None.
None.
Mr Mark Thomas
Company Secretary
Term of Office
Mr Thomas was appointed Company Secretary in
June 2010.
Experience
Mr Thomas joined Fortescue in April 2004 in the role of
Group Financial Controller and went on to become Head
of Finance and IT and then Group Manager Finance.
With more than 15 years experience in the mining and
professional services industries, Mr Thomas has also held
senior finance positions with the Goldfields Australia
Group and with a number of professional service
providers. He has extensive experience in accounting
and finance, IT and business administration in the mining
and professional services industries. Mr Thomas has a
Bachelor of Commerce from the University of Western
Australia, Graduate Diploma in Applied Corporate
Governance, a Masters of Business Administration and is a
Certified Practising Accountant and a Fellow of Chartered
Secretaries Australia.
7
DIRECTORS’ REPORT
Key Management Personnel
8
Mr Stephen Pearce
Mr Nick Cernotta
Director Operations
Experience
Mr Pearce joined Fortescue in March 2010 with more than
20 years experience in senior management roles in the
mining, oil and gas and utilities industries. He previously
held the position of Managing Director and CEO of
Southern Cross Electrical Engineering Limited and before
that was Chief Financial Officer with Alinta Limited.
Mr Pearce has previously served as Chairman of Amadeus
Energy Ltd., and Chairman of Surtron Technologies Pty Ltd.
Experience
Mr Cernotta has more than 30 years experience in the
mining industry, spanning various commodities and
operations in Australia, Africa, South East and Central
Asia, Saudi Arabia and Papua New Guinea. Qualified
with a Bachelor of Mining Engineer, Mr Cernotta comes
to Fortescue with a solid operational background and
experience in both the public and private sectors of the
mineral resources industry.
Mr Pearce has a Bachelor of Business from RMIT,
a Graduate Diploma in Company Secretarial Practice
and is a fellow of the Institute of Chartered Accountants
Australia and New Zealand, a Chartered Secretary and
Member of the Australian Institute of Company Directors.
Prior to joining Fortescue Metals Group, Mr Cernotta was
the Chief Operating Officer for Macmahon Contracting
with responsibility for all domestic underground
contracting and all international offshore surface mining
contracts. Mr Cernotta’s short term with Macmahon
preceded a fruitful and challenging career as Director of
Operations for the Barrick Gold Australia Pacific Regional
Business Unit, which involved a period of rapid growth
through acquisition, new business development ventures
and record profitability. Mr Cernotta has also held senior
executive roles in mining operations and in contracting,
with accountability for Health, Safety and Environmental,
Maintenance, Engineering, Business Improvement and
Technical Services.
Mr Pearce served as a member of the Western
Australian Business and Industry Committee for the
Salvation Army for seven years. He is currently Chairman
of the Lions Eye Institute and a Non-Executive Director
of Cedar Woods Limited.
DIRECTORS’ REPORT
Directors’ meetings
The number of meetings of the Company’s Board of Directors and of each Board committee held during the year ended
30 June 2014 and the number of meetings attended by each Director were:
Committee meetings
Board meetings
Audit
Remuneration
Finance
HeldAttended Held Attended HeldAttended HeldAttended
Andrew Forrest
6
5
*
*
4
4
*
*
Herb Elliott
6
5
*
*
4
3
*
*
Mark Barnaba
66 44 4 4 22
Sharon Warburton
2
2
*
*
2
2
*
*
Owen Hegarty
6
6
*
*
4
4
*
*
Geoff Raby
6
5
*
*
*
*
*
*
Graeme Rowley
64 43 2 1 22
Cao Huiquan1
6
3
*
*
*
*
*
*
Elizabeth Gaines
6
6
3
3
*
*
2
2
Nev Power
6
6
*
*
*
*
*
*
Peter Meurs
6
6
*
*
*
*
*
*
Herbert Scruggs
6
6
4
4
*
*
2
2
Geoff Brayshaw2 4
4
2
2
*
*
2
2
* Not a member of the relevant committee.
1 Mr Cao Huiquan was unable to attend numerous meetings during the year due to potential conflict of interest in his role
as Chairman Valin Iron and Steel Co Ltd.
2 Mr Brayshaw retired in November 2013.
Operating and financial review
Group overview
Fortescue is the world’s fourth largest iron ore producer,
operating in the iron ore rich Pilbara region of Western
Australia with close proximity to the growing economies
of China, South East Asia and India. Fortescue has delivered
unparalleled growth, evolving from a grassroots explorer
in 2003, to a world leader in iron ore production.
During the 2014 financial year (FY14) Fortescue completed
a 100 million tonne (mt) expansion program, increasing
production capacity to 155 million tonnes per annum
(mtpa). Fortescue’s expansion, undertaken to support the
increasing global demand for iron ore, was delivered at an
unprecedented pace with an expansion cost of
US$92 per tonne.
•Increasing shipping capacity at Herb Elliott Port
from 55mtpa to 155mtpa; and
•Building the Hamersley rail line to connect the
Solomon Hub to Fortescue’s existing main rail
link from the Chichester Hub to Port Hedland and
increasing the rail network capacity to 155mtpa by
adding a further 125km of track.
The success of Fortescue’s expansion demonstrates
original thinking, innovation and determination, with new
benchmarks set in safety, costs, schedule and ramp-up.
The key components of the expansion delivered in FY14
included:
The additional capacity of 100mtpa has been delivered
through:
•Ramp-up of Firetail operations to a 20mtpa run rate,
completion and ramp-up of the Kings Valley operation;
•Increasing the output of the existing Cloudbreak
and Christmas Creek mines, the Chichester Hub,
from 55mtpa to 95mtpa;
•Completion of the main track line, rail optimisation
controls and train control systems for the main line
and the Hamersley line; and
•Developing the Firetail and Kings mines, the new
Solomon Hub, to produce 60mtpa;
•Commissioning of the fourth berth and surge bin
at Port.
9
DIRECTORS’ REPORT
All components of the Rail and Port infrastructure, and
the Chichester and Solomon Hubs expansions are now
operational and ramped up to full production capacity.
The targeted 155 million tonne rate per annum was
delivered through the June 2014 quarter and a record
160 million tonnes annualised rate achieved for the
month of June.
Achieving full production capacity has structurally
improved Fortescue’s cost base, reducing C1 operating
costs by 23 per cent to US$34/wmt in the last 12 months,
with a delivered cost to customers of US$52/wmt in
FY14. From a costs perspective, Fortescue continues
to drive down the global cost curve ensuring that it is
well positioned to withstand future volatility in the iron
ore price. Fortescue continues to focus on operational
efficiencies and cost management which, together with
the benefits of a full year of operations from the low cost
Kings Valley mine are expected to result in C1 costs of
US$31/wmt to US$32/wmt in FY15.
10
Fortescue financed its expansion through operating cash
flows and debt sourced from the US high yield and term
loan markets. As operational cash flows have strengthened,
and capital expenditure decreased, Fortescue has
commenced its accelerated debt repayment strategy. To
date, US$3.1 billion of debt has been repaid. The flexibility
built into Fortescue’s debt profile allows further voluntary
repayments or refinancing in excess of 60 per cent of the
Company’s debt prior to maturity.
Fortescue remains absolutely focused on continuing
to improve shareholder value through identification of
additional operating efficiencies and disciplined capital
management, continuing its drive towards being the
safest, lowest cost and most profitable iron ore producer.
Total shipments 124.2mt
54%
Operations
Safety
Health and safety of our people is a core value at Fortescue
and the highest priority in everything we do.
It is with deep regret that two lives were lost in Fortescue
operations during the first half of the 2014 financial year.
In order to prevent these tragedies in the future, Fortescue
has taken decisive actions to reinforce its safety culture
and performance. A number of initiatives have been
implemented, with a particular focus on learnings from
the two fatalities involving contractor employees at
Christmas Creek.
During the year, increased focus has been placed on the
review of safety leadership, culture and systems across
all sites to drive improvement in safety. In addition, an
independent external review was conducted across all
sites, where 6,000 people participated from across each
part of Fortescue’s business to identify opportunities
for improvement. This project is delivering results with
improvement to safety outcomes from focusing on
leadership, contracting processes and the sharing of
incident lessons.
The Total Recordable Injury Frequency Rate per million
hours worked improved by 21 per cent from 7.6 in
June 2013 to 6.0 in June 2014.
Aboriginal engagement
Fortescue’s unique philosophy towards engagement
with Aboriginal communities, particularly our Native Title
Partners, is based on providing sustainable economic
opportunities through business development, training and
employment.
Fortescue is now a national leader in the delivery of
opportunities for Aboriginal businesses. In December 2011
Fortescue set a target to award A$1.0 billion in contracts
to Aboriginal businesses by the end of 2013 through the
Billion Opportunities program. Contracts were awarded
in competitive and open processes in accordance with
Fortescue’s normal governance around procurement and
require Aboriginal businesses to be capable of delivering
projects in a safe, timely and cost competitive manner. The
A$1.0 billion target was achieved in June 2013, 18 months
into the program and six months ahead of schedule. One
year on, the total value of the 160 contracts and subcontracts awarded to more than 50 Aboriginal businesses
is A$1.6 billion. Importantly for Pilbara Aboriginal people,
88 per cent of these contracts were awarded to businesses
associated with Fortescue’s Native Title Partners.
DIRECTORS’ REPORT
training, support and employment. 553 employees,
or 12 per cent, of Fortescue’s workforce are Aboriginal.
Fortescue continues to drive excellence in Aboriginal
engagement through its contracting partners. The
Company’s procurement policies drive local content and
preferences contracting arrangements with Aboriginal
businesses that meet performance and price standards.
Further, Fortescue’s tender and contractor documentation
requires proposals to contain an Aboriginal Engagement
Strategy, including binding commitments to Aboriginal
employment, training, and local Aboriginal business
capacity building. In FY14, the Company has seen
significant increase in the commitment of Fortescue’s
contracting partners to provide second tier opportunities,
with sub-contracts worth A$233 million awarded to
Aboriginal businesses and joint ventures in FY14.
Fortescue’s VTEC program inspired the model promoted
by GenerationOne and now endorsed by the Federal
Government. The Federal Government has committed
A$45 million to fund the establishment of VTECs across
the country. Fortescue is extremely proud of its
role in the development of this nation leading approach
to Aboriginal employment and training, and importantly
over 1,200 Aboriginal people are employed across
Fortescue’s operations.
Production and shipping performance
Record performance was achieved across the integrated
mine, rail and port supply chain in FY14. As the
expansion projects have been completed and successfully
ramped up through the year, the targeted 155 million
tonne annualised rate was achieved in the June 2014
quarter. Total shipments in FY14 were 124.2 million
tonnes (mt) (2013: 80.9mt) including a record 13.3mt
shipped in the month of June, at a 160 million tonne
annualised rate.
Fortescue’s Vocational Training and Employment Centre
(VTEC) is a community-based, pre-employment training
and support program for Aboriginal people. VTEC’s vision
is to change lives through employment, which is achieved
by developing and delivering targeted training courses
based on relevant vacancies within Fortescue and its
contractors. The program also provides support in health,
literacy and work experience to help Aboriginal people
with their fit for work requirements and ensure long term
employment. Since its establishment in 2006, VTEC has
helped more than a thousand Aboriginal people through
Production and shipments on a wet metric tonne basis
were as follows:
12 months to 30 June (millions of tonnes)
2014
2013
Movement
Ore mined
Overburden removed
140.4
94.6
48%
404.5
364.5
11%
Ore processed
126.0
76.1
66%
Ore shipped – Fortescue mined ore
118.4
75.9
56%
Ore shipped – Fortescue equity ore
119.9
77.8
54%
Total ore shipped including third party product
124.2
80.9
54%
Mining, processing and shipping
Fortescue delivered record mining, processing and shipping volumes for the year. Total shipments increased to 124.2mt,
54 per cent higher than the prior year, and comprised 119.9 million Fortescue equity tonnes and 4.3 million third party tonnes.
Total ore mined increased by 48 per cent to 140.4mt, as operations ramped up across the Chichester and the Solomon Hubs.
Mining, million tonnes (wmt)
Processing, million tonnes (wmt)
Shipping, million tonnes (wmt)
140.4
124.2
126.0
94.6
41.3
44.2
FY10
FY11
FY12
80.9
76.1
64.6
FY13
FY14
38.4
40.6
FY10
FY11
53.9
FY12
FY13
FY14
40.1
40.9
FY10
FY11
57.5
FY12
FY13
FY14
11
DIRECTORS’ REPORT
12
As the Firetail project fully ramped up during the year,
Fortescue continued to realise the benefits of blending
low impurity Chichester and higher grade Firetail ore.
This together with the upgrades achieved through the new
processing facilities and beneficiation plants, maximises
product quality enabling reduction in the cut-off grades
and therefore lower strip ratios at the Chichester mines.
These initiatives delivered a strip ratio of 3.5x at the
Chichester Hub in FY14, consistent with the long term mine
plan. The Solomon Hub strip ratio averaged 1.6x for the
year, including 1.3x in the June 2014 quarter as mining was
moving closer to a steady state following the ramp up of
operations at the Kings Valley project.
Production costs
During the year, Fortescue consolidated its processing
operations through the successful transition of operational
responsibilities from the contracting parties for the two
Christmas Creek OPFs and the two Solomon Hub OPFs.
This now gives Fortescue operational responsibility over
all five of its OPFs, enabling shared learnings, synergies,
economies of scale and efficiencies across the business.
Significant focus continues to be placed on the safe and
efficient operation of OPFs across all sites.
Fortescue’s operating costs are largely denominated
in Australian dollars and are subject to movements
in exchange rates with an impact of US$0.25/wmt to
US$0.30/wmt for every one cent movement in the US to
Australian dollar.
Fortescue refers to the operating costs of mining,
processing, rail and port on a per tonne basis as C1.
This measure is used internally and during other external
results presentations to communicate Fortescue’s
operating cost performance. In FY14, Fortescue delivered
a 23 per cent reduction in C1 costs to US$34/wet metric
tonne (wmt) (2013: US$44/wmt). This result reflects
the benefits of lower cost Solomon operations, improved
processing capacity lowering strip ratios at the Chichester
Hub, focus on delivering operational efficiencies and the
lower Australian dollar.
Total delivered costs to customers, inclusive of C1 costs,
shipping, state government royalties and administration
charges, were US$52/wmt or US$56/dry metric tonne
(dmt) in FY14.
million
tonnes
(wmt)during the year,
Processing,
Shipping, million tonnes (wmt)
RailMining,
construction
was
completed
with railmillion tonnes (wmt)
optimisation control systems successfully
commissioned
Fortescue
will
continue
to
focus on cost savings initiatives
140.4
Third party ore
on the mainline in December 2013 and on the Hamersley
and efficiencies at its mines, OPFs and infrastructure 124.2
assets
126.0
line in March 2014. Port operations
achieved
the
to
improve
productivity
and
drive
further
down
the
global
94.6
80.9
targeted capacity of 155mtpa in July 2013, following
cost curve.
76.1
64.6of the AP4 berth and integration of
the commissioning
57.6
53.9
40.0
40.9
44.2 loader with the third outload circuit. The
41.3
the
third ship
38.4 40.6
annualised 155mtpa run rate was first achieved at Port
over a seven day period in December 2013, followed by
FY10 FY11
FY12 at or
FY13
FY10 the
FY11 FY12 FY13 FY14
FY10 FY11 FY12 FY13 FY14
consistent
operation
aboveFY14
this level through
second half of the financial year. The construction of the
fifth berth at Port Hedland (AP5) is currently underway
and is expected to be complete in the March 2015 quarter,
increasing outload capacity by a further 15 – 20mtpa.
Total delivered cost, US$/wmt
52
67
69
23
21
62
52
18
18
21
44
31
FY10
48
FY11
C1
FY12
Shipping, royalty and administration
Net profit after tax, US$million
44
34
FY13
FY14
Total delivered costs
Basic earing per share, US cents
2,740
88.00
DIRECTORS’ REPORT
The reconciliation of C1 costs and total delivered costs to the amounts disclosed in the financial statements is shown below.
2014 2013
Note (i)
US$m
US$m
Mining costs
5
3,442 2,851
Rail costs
5
238 182
Port costs
5
252 181
Operating leases
5
74 133
C1 costs, US$ million
4,006 3,347
Ore shipped – Fortescue mined ore
118.4 75.9
C1, US$/wmt
34 44
Shipping costs
5
1,210 769
Government royalty
5
775 499
Administration expenses
6
112 110
Shipping, royalty and administration, US$/wmt
18 18
52 62
(i)
Notes to the accompanying consolidated financial statements.
Marketing
Fortescue’s suite of products is sold with reference to
the 62 per cent Platts CFR index, a benchmark market
reference for seaborne iron ore, with a market price
comparable to other products which have similar value-inuse properties for steel production.
FY14 has seen a continued increase in iron ore supply
as the major Pilbara iron ore producers have ramped up
production to near full capacity. The increased supply of
seaborne iron ore has created volatility in iron ore prices
during the June 2014 quarter. Fortescue expects iron ore
price to stabilise as supply re-balances in the short term
as Chinese port inventories are drawn down, steel mills restock and higher cost iron ore producers leave the market.
Fortescue has continued to see strong support for its
products with the average realised price of US$106/dmt
(2013: US$114/dmt), based on average 62 per cent Platts
CFR index of US$123/dmt (2013: US$127/dmt). As balance
is restored to the iron ore supply and demand, Fortescue
expects to realise between 85 to 90 per cent of the average
62 per cent Platts CFR index.
13
DIRECTORS’ REPORT
Development
T155 expansion
The official opening of the Kings Valley project in
March 2014 marked the completion of the expansion
to 155mtpa.
The project was announced in November 2010 and has
delivered:
14
2011 Wharf expansion
• Three advanced OPFs with wet processing capability
• Four new crushing hubs
• Over 250km of new rail track
• 300km of new roads
• 50km of conveyor systems
• Two new berths
•Two new train unloaders with associated stock yard
expansion at Herb Elliott Port
• Two new aerodromes
• Highly automated rail ore car refurbishment facility
•A new power station at Solomon and expansion of
power generation capacity at the Chichester Hub
• Extensive new fuel receiving and delivering facilities
• New rail rolling stock and locomotives
• Operations villages at Christmas Creek and Solomon
• Significant expansion of the mobile mining fleet
The expansion has been completed for US$9.2 billion
or US$92 per tonne. All components of the Port, Rail,
Chichester Hub and Solomon Hub expansions have been
ramped up and are operating at full capacity.
Fortescue River gas pipeline
Fortescue is executing a plan to lower energy costs and
reduce its carbon footprint by transitioning its Pilbara
operations from diesel to natural gas. As a first step, the
Fortescue River gas pipeline will deliver gas from the
Dampier to Perth Pipeline to the Solomon Power Station
with completion scheduled in the March 2015 quarter.
2013 Fortescue employees at Kings Valley Mine
Compressed Natural Gas (CNG)
As an interim step in advance of completion of the natural
gas pipeline, Fortescue will truck compressed natural
gas (CNG) from facilities in Port Hedland to gas receiving
facilities installed at the Solomon Power Station. Deliveries
are scheduled to commence in August 2014 and will run
until the Fortescue River pipeline is fully commissioned.
AP5 Project
The project to build the fifth wharf at Anderson Point,
AP5, remains on schedule and on budget for completion
in the March 2015 quarter. Dredging was completed in
the June 2014 quarter and installation of wharf piles has
commenced. All major contracts have been awarded and
fabrications of wharf modules are under way in China and
Western Australia.
Train load-out module being delivered to Solomon
DIRECTORS’ REPORT
Detrital Processing Plant
Construction of a 5mtpa detrital processing plant at
Solomon will allow processing of detrital ore, eliminating
the need for an expensive wet plant addition to the Firetail
OPF. Project duration is estimated at 55 weeks at a cost of
approximately US$105 million.
Iron Bridge Project
Construction activities continue to achieve planned
milestones for Stage 1 of the Iron Bridge magnetite project.
The main construction camp is complete, access roads
and earthworks at the Northstar OPF are nearing
completion and pre-strip activities are progressing.
Concrete works at the OPF are well advanced with
commencement of structural, mechanical and piping
works. A contract has been awarded for the electrical and
instrumentation package of works. First production from
the 1.5mtpa OPF is expected in the March 2015 quarter.
Incremental Train Control System (ITCS)
ITCS has been implemented across Fortescue’s rail system
and is now fully operational. The system is delivering
improvements in train scheduling, operations and
optimisation of the network.
Autonomous Haulage System
The trial of autonomous trucks at Solomon has
demonstrated that the technology is suitable for
deployment across the Firetail and Kings Valley projects.
15
2014 Port AP5 expansion
Ship construction
During the financial year Fortescue entered into
arrangements for the construction of four highly efficient
very large ore carriers (VLOCs) for a total investment value
of US$275 million. The vessels are scheduled for delivery
from November 2016 to May 2017 with the majority of
payments due upon delivery.
The 260,000 dead weight tonnage class vessels are larger
than the traditional capsize vessels that have dominated
the seaborne market and incorporate design specifications
ideally suited to Port Hedland’s tidal conditions. The VLOCs
design complements the port infrastructure and will
improve load rates, efficiencies and reduce operating costs
at Port. Further savings will be derived as the expected cost
of operating these vessels is well below the current forward
market rates for large capsize vessels.
Incremental Train Control System
In July 2014 Fortescue secured construction of four
additional iron ore carriers to be delivered in late 2017 to
early 2018, for a total investment value of US$280 million.
Autonomous trucks at Solomon
41.3
80.9
76.1
64.6
44.2
38.4
40.6
FY10
62
FY11
53.9
40.1
40.9
FY10
FY11
57.5
DIRECTORS’
REPORT
FY10 FY11 FY12
69
67 FY13 FY14
52
FY13
FY14
FY12
FY13
FY14
52
21
23
FY12
18
18
21
Financial
results44
31
48
44
34
Financial results
FY10
FY11
FY12
FY13
FY14
Profit after tax for the
year ended 69
30 June 2014 increased by 57 per cent to US$2,740 million, increasing basic earnings per
67
share
centsroyalty
(2013:and
56.07
cents).
62 Total delivered costs
C1 to 88.00
Shipping,
administration
52
21
52
21
23
18
Basic earnings per share, US cents
18
2,740
31
44
FY10
FY11
C1
581
1,559FY12
1,746
44
34
FY13
FY14
1,019
44
48
FY11
FY12
88.00
50.07
18.85
2,740
FY13
56.07
32.86
FY10
FY14
FY10
44
48
FY11
FY12
FY13
FY14
88.00
32.86
Price realisation, US$/dmt
Operating revenue, US$m
1,746
Fortescue’s strong financial result reflects
improved
operational
performance,
Revenue
and price
realisation as the expansion to 155mtpa was
1,559
56.07
completed and record shipments of 124.2mt were delivered in FY14 (2013: 80.9mt). Financial performance
highlights
50.07
are16,000
discussed below.
160
1,019
581 sales revenue increased by 45 per cent to US$11,753 million,
Operating
due to increased shipments, and was partially
18.85
12,000
120
48
44
48 realisations are illustrated
offset
by a seven 44
per cent decrease
in the realised CFR price. Year on year revenue growth
and price
in the chart below.
FY10
8,000
FY11
FY12
FY13
FY14
FY10
FY11
FY12
FY13
FY14
80
Revenue and price realisation
4,000
40
FY10
FY11
12,000
FY12
Revenue
FY13
FY14
120
Realised CFR price
80
8,000
EBITDA, US$million
40
4,000
5,636
FY10
FY11
2,661
1,107
44
Revenue
FY12
3,035
FY13
3,575
160
16,000
16
48
FY14
Realised CFR price
48
Fortescue uses earnings before interest, tax, depreciation and amortisation (EBITDA) as a key measure of its financial
performance. In FY14, the Group’s EBITDA improved by 58 per cent to US$5,636 million. The reconciliation of EBITDA to the
FY10 reported in the financial
FY11 statementsEBITDA,
FY12
FY13 together with theFY14
financial metrics
under Australian
accounting standards,
five year
US$million
earnings trend, are presented on the following page.
5,636
1,107
2,661
3,035
44
48
3,575
FY10
FY11
FY12
FY13
FY14
C1
DIRECTORS’ REPORT
2,740
88.00
1,746
1,559
50.07
1,019
56.07
2014 2013
32.86
(i)
581
Note
US$mUS$m
18.85
48
44
48
3
CostFY10
of sales excluding
and FY13
amortisation
FY11 depreciation
FY12
FY14
FY10
Gain on disposal of assets and interest in joint venture
Net foreign exchange (loss) gain
4
Revenue and price realisation
4,6
11,753 8,120
FY12 (6,078)FY13
109 (4,703)
FY14
124
(53) 96
4
- 16,000
Administration
expenses
6
(112) Other income
4
17 14
EBITDA
12,000
Re-estimation of unsecured loan notes
FY11 5
34
160
(110)
44
Operating sales revenue
5,636 3,575
120
7
21
33
Finance expenses
7
(741)
(586)
Net gain on refinancing
4
-
23
Finance income
8,000
Depreciation and amortisation
80
5,6
(965) (463)
Assets write-off
6
(22)
(71)
Exploration, development and other
6
(16) (45)
Net profit before tax
FY10
FY11
FY12
FY13
3,913
FY14
2,466
Income tax expense
(1,173)
(720)
2,740
1,746
4,000
Realised CFR price8
Revenue
Net profit after tax
(i)
40
Notes to the accompanying consolidated financial statements
EBITDA, US$million
5,636
3,575
2,661
3,035
1,107
44
48
FY10
FY11
FY12
The increased shipping volumes lifted profits by
US$2,079 million, with the impact of higher revenue
of US$4,387 million offset by the increased cost base,
including C1 costs of US$1,874 million and shipping
costs of US$434 million.
The impact of higher volumes was partially offset by lower
realised prices, as iron ore market prices softened in the
second half of the financial year. In FY14, Fortescue realised
US$106/dmt (2013: US$114/dmt), based on the 62 per cent
CFR Platts index of US$123/dmt (2013: US$127/dmt).
A 23 per cent reduction has been delivered on a cost
per tonne basis over the last 12 months, with C1 costs
FY13
FY14
of US$34/wmt (2013: US$44/wmt). The improved
performance reflects lower cost Solomon production,
improved processing capacity and the introduction
of Fortescue blend, lowering strip ratios at the Chichester
Hub, operational efficiencies and the lower Australian
dollar. Total delivered cost, inclusive of state government
royalties, shipping and administration charges, was
US$52/wmt (2013: US$62/wmt).
State government royalty charges increased consistent
with the higher revenue base. Fortescue pays 7.5 per cent
state government royalty for the majority of its products,
with a concession rate of 5 per cent applicable for
beneficiated fines.
17
(6,000)
(6,044)
(9,000)
(6,355)
DIRECTORS’ REPORTOperating cash flow
Capital expenditure
EBITDA, US$million
1,203
829
276
2,079
149
33
5,636
Fx
Other
FY14
3,575
FY13
Volume
Costs
Price
Other non-operating events forming part of the financial
result include:
18
•In October 2013 Fortescue completed the formation
of a joint venture with Formosa Plastics Group
(Formosa) to develop the FMG Iron Bridge magnetite
project. As part of the transaction, Formosa acquired
a 31 per cent unincorporated joint venture interest
for US$123 million, generating a pre-tax gain of
US$109 million.
Formosa committed to fund the first US$527 million
of capital expenditure in the FMG Iron Bridge
magnetite project and elected to prepay
US$500 million to access Fortescue’s port facilities
at Herb Elliott Port. The second stage of the
FMG Iron Bridge magnetite project, if approved
by the joint venture partners, will be funded by
a contribution of the next US$1,050 million from
Fortescue’s subsidiary, FMG Iron Bridge Limited.
Royalty
•Net finance expenses for the year of US$720 million
(2013: US$553 million), net of capitalised interest
on expansion projects of US$75 million
(2013: $342 million) and including net loss on
early debt retirement of US$53 million.
•Depreciation and amortisation expenses of
US$965 million (2013: US$463 million), following
completion and capitalisation of all components
of the 155mtpa expansion program.
•Income tax expense for the year of US$1,173 million
(2013: US$720 million), at an effective income tax rate
of 30 per cent (2013: 29 per cent).
In FY14, Fortescue paid income tax of US$150 million,
with a further US$666 million payable by December 2014.
In addition, US$717 million in state government royalties
were paid to Western Australian State Government.
The number of shares on issue at 30 June 2014 was
3.1 billion and remain unchanged since last year.
Safety
is a core value at Fortescue
2%
FY10
FY11
Borrowings
FY12
FY13
FY14
DIRECTORS’
REPORT
Cost of borrowings
Leucadia notes and Finance leases
Operating cash flow and capital expenditure, US$million
9,000
6,248
6,000
3,000
(3,000)
2,778
2,808
3,004
FY11
FY12
FY13
1,294
FY10
(584)
FY14
(1,477)
(1,931)
(6,000)
(6,044)
(6,355)
(9,000)
Operating cash flow
Capital expenditure
Cash flows and financial position
Cash and cash equivalents at 30 June 2014 were
US$2,398 million compared to US$2,158 million
at 30 June 2013.
The key factors contributing to the net financing cash
outflows of US$4,625 million were:
EBITDA, US$million
•Early debt repayments of US$3.1 billion, including
829
1,203
US$2.04 billion 2015 senior unsecured notes,
Net cash flows from operating activities increased by
US$0.6 billion 2016 senior unsecured notes,
108 per cent to US$6,248 million (2013: US$3,004 million),
A$0.14 billion preference shares and US$0.3 billion
276
reflecting increased production and lower operating costs.
early settlement of finance
leases;
149
33
5,636
2,079
In FY14, Fortescue paid income tax of US$150 million,
with a further US$666 million payable by December 2014.
•Interest and finance costs paid of US$853 million
Operating cash flows for the financial year are inclusive of
(2013: US$893 million); and
US$712 million receipts from iron ore prepayments and
US$500 million port access charge prepayment.
•Dividend payments of US$581 million
(2013: US$131 million), including payment of final
3,575
Net cash outflow from investing activities, principally
dividend of 10 Australian cents per share for the
capital expenditure, decreased by 77 per cent to
2013 financial year in October 2013 and interim
US$1,392 million,
as
the
capital
expenditure
peaked
in
dividend
of 10 Australian
share for the FY14
FY13
Volume
Costs
Price
Royalty
Fx cents perOther
the previous financial year following completion of the
2014 financial year in April 2014.
155mtpa expansion program.
Fortescue operates the
fastest and heaviest
rail network in the world
19
DIRECTORS’ REPORT
Funding and capital management
Fortescue’s net debt position, including finance leases
and cash on hand, improved from US$10.5 billion at
30 June 2013 to US$7.2 billion at 30 June 2014.
Fortescue is focused on reducing its gearing and
commenced an accelerated debt reduction program in
FY14, with the following initiatives successfully completed
during the year:
•Redemption of A$140 million preference shares,
completed in November 2013;
•Redemption of US$2.04 billion 2015 senior unsecured
notes, completed in December 2013 (US$1.0 billion)
and in March 2014 (US$1.04 billion);
•Pay-out of the Christmas Creek OPFs finance lease
liabilities of US$0.3 billion in January 2014; and
•Redemption of US$0.6 billion 2016 senior unsecured
notes, completed in March 2014.
In November 2013 Fortescue successfully re-priced the
US$5.0 billion Term Loan, reducing the previous margin
by one per cent to 3.25 per cent from November 2013 and
by a further 0.5 per cent to 2.75 per cent from May 2014.
The loan maturity has been extended by 21 months to
30 June 2019. The total coupon payable on the Term Loan
is calculated as LIBOR, with a LIBOR floor of 1.00 per cent
plus the margin.
The above debt repayment of US$3.1 billion and re-pricing
of the Term Loan delivered an interest saving of
US$165 million in FY14, with the full year savings going
forward of approximately US$300 million per annum.
At 30 June 2014, Fortescue’s weighted average cost of
debt decreased to below six per cent per annum. The
below chart illustrates Fortescue’s finance expenses
together with the costs of funding over the last five years.
Cost of borrowings has been calculated using borrowings
balances and interest rates as at the end of the financial
year and excludes Unsecured Loan Notes (Leucadia notes)
and finance lease liabilities.
20
Cost of borrowings
%
10
10.1%
8
7.0%
7.0%
6
6.3%
5.3%
4
2
FY10
44
48
FY11
FY12
FY13
FY14
DIRECTORS’ REPORT
Fortescue has built significant flexibility in its debt profile, which facilitates additional repayments and the ability to further
reduce debt and move towards an initial targeted gearing level of 40 per cent. As illustrated in the debt maturity profile
below, Fortescue’s earliest debt maturity is in 2017. Further, a total of US$5.8 billion, or in excess of 60 per cent, of the
Company’s long term debt is available for voluntary repayment in advance of maturity and at Fortescue’s option.
5,000
4,913
Repayable at Fortescue’s option
4,500
4,000
US$m
3,500
3,000
Callable
in
April 2017
Callable
Callable at
in
Fortescue’s
April 2015
option
2,500
2,000
1,500
Callable in
November 2015
1,500
1,000
1,000
1,000
500
900
500
400
0
CY2014
CY2015
CY2016
CY2017
CY2018
CY2019
CY2020
CY2021
CY2022
Committed to be paid in October 2014
Dividends
The following dividend payments have been completed during the financial year:
•Final fully franked dividend for the year ended 30 June 2013 of 10 Australian cents per share, paid in October 2013;
•Interim fully franked dividend for the year ended 30 June 2014 of 10 Australian cents per share, paid in April 2014.
On 20 August 2014, the Directors declared a fully franked dividend of 10 Australian cents per ordinary share payable
on 3 October 2014.
AUD cents per share
Dividends
21%
20
21%
16%
16%
10
0
20%
10%
0%
FY10
FY11
FY12
Interim
Final
FY13
FY14
0
Dividend payout ratio
Fortescue considers a range of factors when determining an appropriate level of dividend, including the Company’s liquidity
position, mid to long term development profile and gearing levels.
21
DIRECTORS’ REPORT
Strategy
As Fortescue has completed its major expansion program,
the focus has shifted to consolidation of the operations and
maximising the output from the Company’s world class
assets. Whilst each component of the mine, rail and port
operations have been running consistently at the target
capacity over the June 2014 quarter, focus continues on
ways to optimise operations to deliver additional low cost
tonnes from the existing assets base.
From an operational stance Fortescue’s key priority is
the identification of additional efficiencies and driving
the costs down further. In FY15 Fortescue expects to
deliver total shipments of 155 to 160 million tonnes at C1
operating costs of US$31/wmt to US$32/wmt, a 30 per cent
cost reduction over a two year period. Key drivers for the
savings in FY15 will be a full year of production out of Kings
Valley, improved processing capability, and operational
efficiencies and innovations. The construction of VLOCs,
scheduled for completion in 2017 – 2018, will further add
to the reduction of total delivered costs as the vessels are
ideally designed for our Port operations and the expected
cost of operating the vessels is below the current forward
market rates for large capsize vessels.
22
Isak Buitendag, Director Health, Safety and Security
Fortescue continues to evolve its product strategy, including
a successful launch of Fortescue Blend in FY14, a high
quality product that maximises the benefits of low impurity
Chichester and higher iron content Firetail product. In July
2014, Fortescue introduced its new low alumina, 58 per cent
iron grade Kings CID product, which further complements
Fortescue’s product offering of high value-in-use iron ore fines.
Reclaimer at Port Hedland
Fortescue is committed to driving down its gearing to the
initial target of 40 per cent. In order to achieve this gearing
target, a further debt repayment of US$2.0 billion to
US$2.5 billion is required, which is expected to be executed
over the next 18 to 24 months. The exact timing of these
repayments will depend on a number of factors, including
iron ore prices and the Australian dollar exchange rate.
Once the gearing target of 40 per cent is achieved,
Fortescue is planning to move to a 30 to 40 per cent
dividend payout ratio.
Fortescue continues to strategically evaluate incremental
growth opportunities, with a number of projects increasing
output with minimal capex underway. These include the
design and construction of a five million tonne per annum
wet processing plant, providing a lower cost and more
efficient solution for the detritals product out of Kings.
The construction of AP5 berth scheduled for completion in
March 2015 is also progressing well and, once complete, will
increase the outload capacity by 15 to 20 million tonnes per year.
The electrical team in Port Hedland checking a cable relay break
on a Stacker at the Port
DIRECTORS’ REPORT
Environmental regulation and performance
Fortescue is committed to minimising the impact of its
operations on the environment. The Board takes seriously
the need for continuous monitoring of environmental
matters and compliance with environmental regulations.
Fortescue’s exploration, mining, rail and port activities are
subject to various environmental regulations under both
State and Commonwealth legislation.
Fortescue manages compliance with its environmental
responsibilities and sets its objectives and targets through
its Environmental Management System. Fortescue identifies
risks of environmental impact from its projects and operations
and sets improvement plans for the highest environmental
risks. Fortescue measures its environmental performance
against its regulatory requirements and corporate targets.
Fortescue’s environmental performance is reported to a
hierarchy of management.
As a part of the Environmental Management System,
Fortescue also conducts internal environmental reviews,
audits and inspections to identify and quantify potential
risks to Fortescue and to review compliance with its
environmental obligations. The fundamental aim of each
activity is to minimise or prevent adverse environmental
consequences and to promote a culture of compliance.
Fortescue strives to continually improve its environmental
performance by a systematic review of its environmental
risks. During the financial year, certain aspects of the
Fortescue’s operations were routinely inspected by the
Department of Environment Regulation (DER) (previously
the Department of Environment and Conservation) and
the Department of Sustainability, Environment, Water,
Population and Communities (DSEWPC). Work continued to
resolve a number of potential non-compliances relating to
works approvals and licences identified and reported to the
DER in 2012.
During the financial year, Fortescue has submitted
numerous environmental reports and statements
to regulators detailing Fortescue’s environmental
performance and level of compliance with relevant
instruments. This includes Fortescue’s Compliance
Assessment Reports dated March 2014, which were
provided to the Office of the Environmental Protection
Authority, and the Annual Environmental Reports
submitted to the Department of Mines and Petroleum
and the Department of State Development.
23
Fortescue Marshes
Ring tailed dragon
Mulgara
DIRECTORS’ REPORT
Greenhouse gas and energy reporting
Fortescue complies with the Australian government National Greenhouse and Energy Reporting Act 2007 (Cth) and the
Energy Efficiency Opportunities Act 2006 (Cth). Fortescue is committed to proactively managing energy consumption and
greenhouse gas emissions wherever practical and is guided by a formal internal policy. The total Scope 1 and Scope 2
greenhouse gas emissions for the most recent reporting period were 1.85 million tonnes of carbon dioxide equivalents.
Fortescue’s greenhouse emissions are almost entirely related to combustion of diesel fuel and, therefore, the Company was
not considered a liable entity under the Clean Energy Legislation carbon scheme.
Directors’ interests
The relevant interest of each Director in the shares, options and performance rights issued by the Company as notified by
the Directors to the Australian Securities Exchange in accordance with section 5205G(1) of the Corporations Act 2001, at the
date of this report are as follows:
Performance
Director
Ordinary shares
Options
rights
A Forrest
24
1,033,479,247 -
H Elliott
2,167,938 -
N Power
1,254,981
-
2,038,602
M Barnaba
-
-
-
-
G Brayshaw
52,149 - -
O Hegarty
40,000
-
-
C Huiquan
-
-
-
G Raby
G Rowley 8,000 -
-
17,644,951
-
-
H Scruggs
E Gaines P Meurs
-
-
-
50,000 -
-
26,006,995 7,500,000
792,791
-
-
-
S Warburton Unissued shares under options and performance rights
Details of the options and performance rights outstanding at 30 June 2014 are as follows:
Balance
Exercise
at the end
price
of the year
A$
Number
Employee options 2010
Vested and exercisable at
the end
of the year
Number
5.00 7,500,000
Remaining
contractual
life
Months
-10
Long term performance rights 2013
Nil
2,935,785
-
18
Short term performance rights 2014
Nil
3,651,255
-
6
Nil
-
30
5,139,280
19,226,320
-
DIRECTORS’ REPORT
Directors and officers indemnities and insurance
Future developments
Since the end of the previous financial year, the Company
has paid premiums to insure the Directors and Officers
of Fortescue.
Fortescue discloses its likely future developments in the
Strategy section of this report. Further information in
relation to likely developments and the impact on the
operations of the Group has not been included in
this report, as the Directors believe it would result in
unreasonable prejudice to the Group.
The liabilities insured are legal costs that may be incurred in
defending civil or criminal proceedings that may be brought
against the Officers in their capacity as Officers of Fortescue,
and any other payments arising from liabilities incurred by
the Officers in connection with such proceedings, other
than where such liabilities arise out of conduct involving
a wilful breach of duty by the Officers or the improper use
by the Officers of their position or of information to gain
advantage for themselves or someone else or to cause
detriment to Fortescue. It is not possible to apportion
the premium between amounts relating to the insurance
against legal costs and those relating to other liabilities.
Conditions of the policy also preclude disclosure to third
parties of the amount paid for the policy.
Non-audit services
The Company may decide to employ the auditor on
assignments additional to their statutory audit duties
where the auditor has relevant expertise and experience
and where the auditor’s independence is
not compromised.
Details of the amounts paid or payable to the auditor
PricewaterhouseCoopers Australia and related entities for
audit and non-audit services provided during the year are
set out in note 23 to the financial statements.
The Board of Directors has considered the position
and, in accordance with advice received from the
Audit and Risk Management Committee, is satisfied that
the provision of the non-audit services is compatible
with the general standard of independence for auditors
imposed by the Corporations Act 2001. The Directors are
satisfied that the provision of non-audit services by the
auditor, as set out below, did not compromise the auditor
independence requirements of the Corporations Act 2001
for the following reasons:
Significant change in state of affairs
There have been no significant changes in the state of affairs
of Fortescue, other than disclosed in this report.
Proceedings on behalf of the Group
No person has applied to the Court under section 237 of the
Corporations Act 2001 for leave to bring proceedings on behalf
of the Group, or to intervene in any proceedings to which the
Group is a party, for the purposes of taking responsibility on
behalf of the Group for all or part of those proceedings.
No proceedings have been brought or intervened in on
behalf of the Company with leave of the Court under
section 237 of the Corporations Act 2001.
Rounding of amounts
The Company is of a kind referred to in Class order 98/100,
issued by the Australian Securities and Investments Commission,
relating to the “rounding off” of amounts in the financial report.
Amounts in the Directors’ report and the financial statements
have been rounded off in accordance with that Class Order
to the nearest million dollars, unless otherwise stated.
Events occurring after the reporting period
On 20 August 2014, the Directors declared a final
dividend of 10 Australian cents per ordinary share payable
on 3 October 2014.
On 20 August 2014, Fortescue announced its intention to
redeem US$500 million of the 2018 senior unsecured notes
in October 2014.
•all non-audit services have been reviewed by the
Audit and Risk Management Committee to ensure
they do not impact the impartiality and objectivity
of the auditor; and
This report is made in accordance with a resolution of Directors.
•none of the services undermine the general principles
relating to auditor independence as set out in APES
110 Code of Ethics for Professional Accountants.
Mr Andrew Forrest
Chairman
Dated in Perth this 20th day of August 2014.
25
REMUNERATION REPORT
The Directors of Fortescue Metals Group Limited
are pleased to present the Remuneration Report for the
year ended 30 June 2014 (‘FY2014 or FY14’). This report
forms part of the Directors’ Report and has been audited
in accordance with section 308 (3c) of the Corporations
Act 2001.
The report is outlined in the following sections:
a) Who this report covers
27
b) FY2014 overview and year ahead
28
c) Governance of our remuneration
30
d) Executive remuneration strategy
32
e) Executive remuneration structure
33
f ) Key components of Executive remuneration
34
g) How Fortescue performed over the past five years 38
26
h) Securities trading policy
39
i) Executive contract terms
39
j) Detailed remuneration for Executives
40
k) Non-Executive Director remuneration
44
l)Equity Instrument disclosures relating to key management personnel45
Whilst the functional and reporting currency of Fortescue
is US dollars, it is the Directors’ view that presentation
of the information in Australian dollars provides a more
accurate and fair reflection of the remuneration practices
of Fortescue, as all Directors, Executives and Employees
are remunerated in Australian dollars.
REMUNERATION REPORT
a) Who this report covers
This report outlines the remuneration arrangements for Fortescue’s Key Management Personnel (KMP).
KMP are defined as ‘those persons having authority and responsibility for planning, directing and controlling the activities
of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity’.
The KMP of the Group for FY14 were:
Non-executive Directors
A ForrestChairman
H Elliott
Deputy Chairman
M Barnaba
G Brayshaw
Non-Executive Director (retired 13 November 2013)
E Gaines Non-Executive Director
O Hegarty
C Huiquan
G Raby
G Rowley
H Scruggs
S Warburton
Non-Executive Director (appointed 13 November 2013)
Executive Directors
N Power
P Meurs
Director Development
Other key management personnel (executives)
N Cernotta
Director Operations (appointed 24 March 2014)
S Pearce
D Woodall
Director Operations (resigned 12 December 2013)
There were no changes to Key Management Personnel after the reporting date.
27
REMUNERATION REPORT
b) FY14 overview and year ahead
Fortescue’s remuneration strategy seeks to build a performance orientated culture by attracting and retaining the best
possible people to align with driving increased shareholder value.
Fortescue’s Board and Remuneration and Nomination Committee (R&NC) are committed to continued review and
refinement of the remuneration strategy to ensure it meets the changing needs of the organisation, maintains market
competitiveness, and aligns to shareholder interests.
In support of the remuneration strategy, the following table highlights key changes made in FY14:
Key Area
Description
Approach to Safety Measure in the event of a fatalityIn the event of a fatality, ESSIP participants (Group Managers,
General Managers and Executive) will receive no award for the
Company Safety KPI and all staff at the location where the
fatality occurs will receive no award against Company or
Team Safety KPIs.
FY14 Remuneration Outcomes - Linking Performance and Pay
The following explains how fixed and variable remuneration outcomes were driven by company performance in FY14.
28
Element of Remuneration
Outcome
Total Fixed Remuneration (TFR)A market review was conducted for the CEO which resulted
in an increase in total fixed remuneration to $2,000,000
(11.1 per cent) effective from 1 July 2014. Prior to this review the
CEO’s fixed remuneration had not increased since February 2011.
A market review was conducted which identified that Executive
total fixed remuneration has fallen below competitive levels.
Accordingly, the Board made a decision to increase fixed
remuneration for Executives (on average) by 3.3 per cent to
re-align with the market and increase retention opportunity.
Prior to this review, fixed remuneration for Executives had not
increased since July 2011.
Executive and Senior Staff Incentive Plan (ESSIP)Awards made in relation to the FY14 ESSIP reflect the
achievement of one of the three company performance
objectives delivering a significant reduction in C1 costs, the
achievement of Company growth objectives and individual
performance objectives. Although the TRIFR measure was
met, no award was made in respect to this measure as detailed
in the FY14 changes above.
Refer to section (f ) for more detail.
The outcome represents an average payment of 76 per cent
of maximum opportunity compared with an average payment
of 78 per cent of maximum opportunity in FY13.
Long Term Incentive Plan (LTI)LTI grants were made in December 2013 in respect to the
FY14 LTI plan. The performance period for the FY14 LTI is
1 July 2013 to 30 June 2016 and award outcomes for the
FY14 LTI plan will be reported in the 2016 remuneration report.
REMUNERATION REPORT
Executive Total Earnings in FY14
Details of remuneration received by the Chief Executive Officer and Executives prepared in accordance with statutory
requirements and accounting standards are detailed on page 40. The table below sets out the total earnings for the
Chief Executive Officer and Executives realised in FY14 – sometimes referred to as ‘actual’ pay. The table includes fixed
remuneration, the cash component of the ESSIP earnings for FY14 performance and the value of the share component
of the FY14 ESSIP that vested.
Fixed
FY14 ESSIP Name
remuneration1
Cash Paid
FY14 ESSIP4
Shares Awarded
Total Actual
Remuneration
Earned in 2014
3,872,780
N Power
1,800,000 -
2,072,780
S Pearce
1,050,000 -
957,043
2,007,043
P Meurs
1,050,000 -
872,335
1,922,335
N Cernotta2
261,941 57,721
82,784
402,446
D Woodall3
410,017 - - 410,017
Fixed remuneration includes cash salary, paid leave and superannuation.
Mr Cernotta was appointed on 24 March 2014.
3
Mr Woodall resigned on 12 December 2013.
4
The actual share value to the individual is not realised until the shares are awarded. For the purpose of this report the
nominal ESSIP share value for FY14 is the value of the participant’s elected weighting in shares (minimum 50 per cent
of the total award) divided by the VWAP of Fortescue Shares for the first five trading days of the plan year (A$3.1653)
multiplied by the 5 day VWAP of Fortescue shares for the first five trading days of FY15 ($4.5397).
1
2
29
REMUNERATION REPORT
c) Governance of our remuneration
At Fortescue, we believe that robust governance is critical to underpinning the effectiveness of our remuneration
strategy.
The Remuneration and Nomination Committee operates under a Board-approved charter. This includes responsibility for
reviewing and reporting to the Board on Executive remuneration policy and practices such as remuneration levels and
incentive plans. It also includes recruitment, retention, performance management, succession planning and termination
policies and managing Board nomination, including determining candidate criteria and addressing skills and experience
requirements for Board position vacancies.
A copy of the charter is available under the Corporate Governance section of the Fortescue Website.
The R&NC in FY14 consisted solely of Non-Executive Directors. The Chief Executive Officer and others may be invited to
attend meetings by the Committee Chair as required, but have no vote on matters before the Committee.
The process and accountabilities in determining remuneration are shown below:
30
Remuneration
consultants
Board of Directors
May be engaged
directly by
the Board or
Remuneration
and Nomination
Committee to
provide advice
or information
relating to KMP
that is free from
influence of
management.
• Approving the remuneration of non-executive directors
and the CEO
Responsible for:
• Ensuring remuneration practices are competitive and align
with the attraction and retention policies of the Company
Remuneration and Nomination Committee
Advises the Board on:
• Remuneration policies and practices
• Non-executive director remuneration
• Executive remuneration
Human Resources Management
Remuneration
consultants
• Implementation of remuneration policies and practices
Will be engaged
directly by
management
other than in
respect of KMPs
to provide advice
and market
data to ensure
Fortescue’s
remuneration
position remains
competitive.
Responsible for:
• Advising the Remuneration and Nomination Committee
of changing statutory market conditions
• Provides relevant information to the Remuneration and
Nomination Committee to assist with decisions
REMUNERATION REPORT
Use of remuneration consultants
During the year, Egan Associates provided external remuneration advice to the R&NC. During FY14, Egan Associates
provided remuneration recommendations (as defined in the Corporations Act 2001) relating to a review of the structure
for KMP remuneration.
The remuneration recommendations were provided to the R&NC as an input into decision making only. The R&NC
considered the recommendations, along with other factors, in making its remuneration decisions.
The total fee was paid for the remuneration recommendations was A$17,500 (ex GST). Other services provided by Egan
Associates included other advisory services and the fees for all other services were A$8,645 (ex GST).
The following arrangements were made to ensure that the advice was free of undue influence by members of the KMP:
•
Egan Associates was engaged by the Chair of the R&NC of the Board
•Fortescue Management were not involved in the formulation of any remuneration recommendations, but provided
factual information to assist Egan Associates
•
Egan Associates provided the remuneration recommendation only to the Chair of the R&NC.
Due to the implementation of these measures, the Board and R&NC are satisfied that the advice provided was free from
undue influence from members of Fortescue’s KMP and Egan Associates have provided a written statement to this effect.
Clawback Policy
Fortescue operates a Clawback Policy. Clawback will be initiated where in the opinion of the Board:
1) an Award, which would not have otherwise vested, vests or may vest as a result directly or indirectly of:
a)the fraud, dishonesty or breach of obligations (including, without limitation, a material misstatement of financial
information) of any person; or
b)any other action or omission (whether intentional or inadvertent) of any person, the Board may make a
determination to ensure that no unfair benefit is obtained by any Participant; or
2)an Award, which may otherwise have vested, has not vested as a result directly or indirectly of any circumstance
referred to in paragraphs (1)(a) or (b) above, the Board may reconsider the level of satisfaction of the applicable
Conditions and reinstate and vest any Award that may have lapsed to the extent that the Board determines appropriate
in the circumstances.
31
REMUNERATION REPORT
d) Executive remuneration strategy
Fortescue’s reward strategy seeks to build a performance orientated culture that supports the achievement of our
strategic vision and to attract, retain and motivate its employees by providing market competitive fixed remuneration
and incentives.
The reward strategy also supports Fortescue’s extraordinary growth and progression as one of the world’s leading
producers of iron ore through:
•
being well positioned to deliver fair and market competitive rewards;
•
supporting a clear performance focus; and
•
alignment to the long term goals of the organisation.
Fortescue is committed to providing competitive remuneration packages to our Executives and senior employees.
Fortescue benchmarks remuneration components against major indices such as ASX 100 Resources and ASX 30 and also
seeks input from independent remuneration consultants regarding Executive remuneration as detailed in section (c) above.
The overall intent is to ensure that executive remuneration is appropriately positioned to motivate, attract and retain key
Executives and senior employees to deliver on the current and long term strategic activities of the Company.
How remuneration practices align with our reward strategy
32
Remuneration strategy principle
Purpose
Practice
High levels
of share ownership
Drive alignment of employee
and shareholder interests
A minimum 50 per cent of the ESSIP
paid in shares with Executives able
to elect up to 100 per cent in shares.
LTIP awarded as shares
Market competitive
remuneration
Attract and retain key talent and
be competitive against relevant
companies
Remuneration is benchmarked
against the ASX 100 Resources
and ASX 30 Indices
Performance focus
Provide fair reward in line with
individual and company
achievements
Executive remuneration mix
targets a minimum of 63 per cent of
the total opportunity ‘at risk’
Fit for purpose
Include flexibility to reflect clear
linkage to business strategy
Business strategy is prioritised;
market practice is only one input
in determining the relevant
framework
Strategic alignment
Support delivery of long term
business strategy and growth
aspirations
Incentives are measured on
financial and non-financial performance
to support sustainable growth
Shareholder
and Executive alignment
LTI rewarding sustained
performance over a three
year period
A significant portion of executive
remuneration granted as performance
rights vesting subject to short and
long term performance hurdles
REMUNERATION REPORT
e) Executive remuneration structure
Executive remuneration has a fixed component and a variable ‘at risk’ component, the payment of which is dependent
on the achievement of Company performance and growth targets and individual objectives.
The key components of the executive remuneration structure for FY14 comprised:
•
Total Fixed Remuneration (TFR);
•
Executive & Senior Staff Incentive Plan (ESSIP); and
•
Long Term Incentive Plan (LTI).
Remuneration may also include participation in the Salary Sacrifice Share Plan (SSSP).
Total remuneration comprising each of these components is benchmarked against the market taking into account the
Company’s position as the world’s fourth largest iron ore producer and explorer and its ranking in the top thirty listed
Australian companies. Remuneration is benchmarked against companies in the ASX 100 Resources Index, with total
remuneration targeted at the third quartile. Total reward opportunities are intended to provide Executives the opportunity
to earn 75th percentile rewards for outstanding performance against stretch targets. Information provided by Egan
Associates revealed that current total remuneration levels are generally consistent with this policy.
Remuneration Mix
The table below shows the remuneration mix for performance at stretch for the CEO and Direct Reports in FY14:
28%
CEO
31%
36%
Direct Reports
0%
41%
28%
20%
40%
TFR
ESSIP (at risk)
36%
60%
80%
100%
LTI (at risk)
* Note the table above represents the remuneration mix for stretch levels of performance for the CEO and CEO Direct
Reports in FY14 and does not take into consideration options granted to Mr Peter Meurs at the start of his employment
or any value that may be attributed to the guarantee provided by the Minderoo Group which supported certain senior
executives in purchasing Fortescue shares on-market.
The above table clearly illustrates the significant proportion of ‘at-risk’ components of executive remuneration and serves
to reinforce the pay-for-performance alignment.
33
REMUNERATION REPORT
f) Key components of Executive remuneration
Total Fixed Remuneration
TFR comprises base salary, cash allowances (such as site-based or location allowances), employee benefits and
superannuation. The level of TFR is based on the Executive’s responsibilities, experience and qualifications. Company and
individual performance are considered during the annual remuneration review process.
Executive and Senior Staff Incentive Plan
The purpose of the ESSIP is to incentivise and reward key Fortescue Executives (including KMP) for achieving Company and
individual performance objectives that drive shareholder value.
An Executive’s ESSIP potential award is linked 50 per cent to Company objectives, and 50 per cent to individual
performance, aligning Executive remuneration with Company performance during the Plan Year.
A maximum incentive opportunity is established at the beginning of the financial year for each Executive. The incentive
is delivered as a minimum of 50 per cent in ordinary shares, and a maximum of 50 per cent in cash. The plan allows
participants to elect to receive up to 100 per cent of the incentive in shares. Share rights are granted based on the election
made by the participant and represent the maximum number of shares that may be awarded subject to performance.
Shares rights are calculated based on the Volume Weighted Average Price (VWAP) of Fortescue shares traded over the first
five trading days of the plan year (eg. 1 July 2013 to 5 July 2013).
The maximum incentive opportunity for KMPs in FY14 is shown below:
34
Direct Reports 112.5 per cent of TFR*
1 participant
75 per cent of TFR*
3 participants
* Note that the actual award outcomes under the ESSIP will be determined by the number of objectives achieved and the
value of the Fortescue shares at time of vesting.
Individuals who leave during the year (i.e. before 30 June) are not eligible to receive an ESSIP award, unless by specific
R&NC approval. On receipt of such approval, the ESSIP is pro-rated based on service during the period, and made at the
usual payment date, which is around September of each year, post release of audited and approved full year results.
Individuals who commence during the year similarly will have awards under the ESSIP pro-rated based on service during
the performance period.
ESSIP performance objectives
ESSIP awards are made based on an assessment of Company and individual performance. Company performance
comprises company annual performance and company growth performance, and is designed to provide both a short and
long term perspective on performance, and protect the long term interests of the shareholder by seeking to ensure efficient
processing of reserves mined and that financial objectives are met.
The financial performance measures were chosen as they represent the key drivers for the short term success of the Company
and provide a framework for delivering long term value. The non-financial component of the ESSIP is measured with reference
to an assessment against a range of measures. A majority of the non-financial measures are quantitative-based.
REMUNERATION REPORT
The performance objectives in 2014 are shown below:
FY14
Results
CEO
Direct Reports
WeightingOutcomeWeightingOutcome
Company Annual Performance
Safety2 Target percentage reduction (15 per cent) in
Total Recordable Injury Frequency Rate (TRIFR)
Production2 Target tonnes shipped
Cost1
Target cost per tonne shipped
Met*
Not Met
Met
15
15
15
0
8
0
0
8
0
16.438 8.73
Company Growth Performance
Culture2
Achieve agreed workforce culture
and engagement targets
Met
15
15
0
n/a
Growth2
Identify and independently verify additional
target expansion opportunities by 30 June 2014
Met
10
10
8
8
Financial1 Achieve target annual Absolute Return
on Equity (AROE) of >20%
Met
10
10
10
10
Financial1 Achieve Target free cash flow Met
10
10
0
n/a
Physical2 Target percentage of reserves mined is
converted (after processing losses) to product,
inclusive of quality measurement (e.g. grade
expectations and real mined tonnage)
Met
10
10
8
8
Individual Performance
4 objectives based on the business plan Avg
weighted according to business impact
Partially Met
0
0
50
37.5
Financial Targets.
Non-Financial Targets.
3
A key element of our culture is to set challenging stretch targets and strive to outperform those targets. In the 2014
year we set ourselves a number of key targets in respect of cost reduction across all operating and support functions.
These cost reduction targets are a high priority for the Board and they have approved an above target award to reflect
the degree of outperformance by the business in this area. This is contrasted with the production measure where the
business fell marginally short of the stretch target and received no award for this element.
1
2
* Although the TRIFR measure was achieved in FY14, as a result of the two fatalities during the year, ESSIP participants (Group
Managers, General Managers and Executive) will receive no award for the Company Safety KPI and all staff at the location
where the fatalities occurred will receive no award against Company or Team Safety KPIs.
In FY14, the CEO was measured solely against Company performance outcomes thereby ensuring the alignment between
Company performance, shareholder returns and CEO reward for the performance year.
Payment of ESSIP awards are made in September after the release of the Company’s audited results and with final approval
from the Board.
How Objectives and Weightings are Determined
ESSIP targets and measures are set on an annual basis and are linked to the annual stretch budget and Fortescue’s strategic
plan. Personal objectives are set at stretch levels of performance with measures and weightings aligned to the individual’s
ability to influence outcomes and ensure focus on critical outcomes.
The following table shows the relationship between the primary ESSIP performance measures for the CEO and other KMP.
35
REMUNERATION REPORT
Chief Executive
Officer
Chief Financial
Officer
Director
Development
Director
Operations
36
FY15
20%
FY14
20%
15%
FY15
10%
FY14
8%
FY15
10%
FY14
8%
15%
42%
8%
43%
10%
8%
0%
20%
Safety
15%
25%
13%
13%
13%
53%
23%
20%
20%
50%
18%
21%
10%
28%
17%
25%
FY14
20%
35%
10%
FY15
30%
13%
17%
13%
18%
40%
Production
28%
60%
Financial
22%
Growth
13%
80%
100%
Other
* Other includes measures associated with culture, engagement and functional objectives.
How the ESSIP works: an example
The ESSIP is designed so that participants are generally rewarded similarly to a Fortescue investor over the financial year.
Example:
The example below assumes that Executive A has an incentive opportunity of $100,000 and has elected to take
70 per cent of the incentive in shares.
Details of offer
Nominal Value of full award
VWAP at start of FY14 (1 to 5 July 2013)
Participant Share Weighting
Maximum potential award
Cash (30 per cent of opportunity)
Share Rights (70 per cent of opportunity)
Example outcome
Percentage of incentive opportunity achieved (company and personal performance)
Cash paid (80 per cent of cash component)
Shares awarded (80 per cent of share rights convert to ordinary shares)
$100,000
$3.1653
70%
$30,000
22,115
80%
$24,000
17,692
The actual value of the shares awarded is subject to share price movement thereby ensuring alignment with
shareholder interests.
REMUNERATION REPORT
ESSIP performance in FY14
Performance rights granted under the ESSIP at the beginning of FY14 are shown below. All the performance rights
issued convert to ordinary shares if all ESSIP objectives are met. The last column details the actual number of share rights
converted to ordinary shares based on actual performance:
ESSIP
Performance rights
ESSIP
ESSIP
performance
to convert performance
performance
rights
to shares for FY14 Executive
rights issued
rights lapsed
forfeited
ESSIP performance
N Power
639,750
183,160
-
456,590
S Pearce
248,792
37,976
-
210,816
P Meurs
248,792
56,635
-
192,157
N Cernotta
30,527
12,291
-
18,236
D Woodall
106,625
-
(106,625)
-
Unvested share rights lapse once the outcome of the ESSIP is determined.
The table below details the maximum ESSIP cash and share awards against the actual outcomes for FY14. The share
components are based on the share weighting election of each Executive:
Maximum
Maximum ESSIP
ESSIP
Service
Maximum ESSIP Shares outcome
opportunityWeighting pro-rata
ESSIP opportunity awarded ESSIP
2014
(per cent in shares
(if
Cash
value at
(per cent Cash
A$
TFR
of TFR)
(per cent) applicable) opportunity
grant1
of TFR) awarded
ESSIP
share
value
at
award2
Executive Directors
N Power
1,800,000
112.5
100
-
-
2,025,000
71
- 2,072,780
P Meurs
1,050,000
75
100
-
-
787,500
77
-
872,335
1,050,000
75
100
-
-
787,500
85
-
957,043
950,000 75
50
0.27
96,627
96,627
60
57,791
82,784
Executives
S Pearce
N Cernotta 2
The value at grant is the participant’s elected weighting in shares (minimum 50 per cent of the total award) divided by
the strike price used to determine the number of share rights granted being the VWAP of Fortescue shares traded over
the first five trading days of the Plan year ($A3.1653).
2
The actual share value to the individual is not realised until the shares are awarded. For the purpose of this report the
nominal ESSIP share value for FY14 is the number of shares awarded multiplied by the five day VWAP of Fortescue shares
traded over the first five trading days of FY15 (A$4.5397).
3
1
Long Term Incentive Plan
LTI awards to executives are made under the performance share plan rules and are delivered in the form of Performance
Rights (Rights). Each Right entitles the holder (subject to achievement of the specified performance conditions) to one fully
paid ordinary share in the Company for nil consideration.
The Company uses absolute return on equity (AROE) as the performance measure for assessments of LTI awards.
AROE was selected as the LTI performance measure for the following reasons:
•AROE is one of the most important value metrics reflecting profit earned relative to shareholders equity (the amount of
capital invested by shareholders); and
•
AROE performance in excess of the Company’s cost of equity capital will deliver shareholder value.
As with the ESSIP above, the long term incentive plan is designed so that participants are generally rewarded similarly to a
Fortescue investor over the relevant performance period.
37
REMUNERATION REPORT
A minimum 20 per cent annual AROE hurdle rate was selected for the following reasons:
•
20 per cent exceeds the Company’s cost of equity;
•
The average AROE for the ASX 100 Resources Index from 2009 to 2013 is 8.5 per cent;
•
The 80th percentile AROE for the ASX 100 Resources Index from 2009 to 2013 is 15 per cent.
The vesting schedule is as follows:
Average AROE
Performance
FY 13
FY 14
Vesting
Below Threshold
<15%
<20%
Nil
Threshold
15%
20%
Target
30+%30+%
25 per cent of share rights vest
100 per cent of share rights vest
Vesting between threshold and target is calculated linearly.
The performance period for the FY14 LTI is from 1 July 2013 to 30 June 2016. Share Rights will convert to shares at the end
of the three year performance period subject to performance against the AROE performance measure. The average AROE
over three years will be measured as the sum of AROE for years 1, 2 and 3 divided by 3. Average AROE less than Threshold
Performance will result in no award.
38
In the event of a change of control of the Company, the performance period end date will generally be brought forward to
the date of the change of control and awards will vest over this shortened period, subject to ultimate Board discretion.
The Clawback Policy also applies to this plan.
Salary Sacrifice Share Plan
Executives may nominate an amount (up to A$5,000 per annum) of pre-tax salary to acquire ordinary shares under the SSSP.
Provided ordinary shares are kept in the SSSP, income tax on the acquisition of these ordinary shares can be deferred by the
Executive for up to seven years. Disposal restrictions apply while the shares remain in the SSSP. Shares acquired under this
plan are not subject to performance conditions because they are issued in lieu of salary which would otherwise be payable
and are subject to a monetary limit of A$5,000 per annum.
g) How Fortescue performed over the past five years
Fortescue continues to build on its performance over the past five years, showing strong growth in revenue and net
profit to deliver shareholder wealth.
In considering Fortescue’s performance and benefits for shareholder wealth, the Board have regard to the following indices
in respect of the current financial year and the previous four financial years.
In FY14, Fortescue’s share price increased from the FY13 closing price of A$3.04 to A$4.35 at the end of FY14. This represents a
43 per cent increase compared with the ASX 100 Resources index which increased 14.2 per cent over the corresponding period.
2013
2012
2011 2010
11,611
8,057
6,681
5,442
3,220
Net profit – US$million
2,740
1,746
1,559
1,022
581
A$ dividends paid
$0.20$0.10$0.08$0.03 -
A$ change in share price
$1.31
$(1.81)
$(1.45)
$2.23
$0.43
43
(37)
(23)
54
12
Revenue from iron ore operations – US$millon
per cent change in share price
2014
An explanation of how fixed and variable remuneration outcomes were driven by company performance in FY14 is included
in section (b).
REMUNERATION REPORT
h) Securities trading policy
Fortescue’s Securities Trading Policy provides clear guidance on how company securities may be dealt with.
The Securities Trading Policy details acceptable and unacceptable periods for trading in Company Securities including
detailing potential civil and criminal penalties for misuse of confidential information.
Fortescue’s Security Trading Policy provides guidance on acceptable transactions in dealing in the Company’s various
securities, including shares, debt notes and options.
The policy also sets out a specific governance approach for how the Chairman and Directors can deal in Company Securities.
The Company’s Security Trading Policy can be accessed from the Corporate Governance section of the Fortescue Website.
i) Executive contract terms
Remuneration and other terms of employment for Executives are formalized in a service agreement.
The CEO and Executives are employed on a rolling basis with no specified fixed term. The CEO and Executives are
remunerated on a total fixed remuneration (TFR) basis inclusive of superannuation and allowances.
The major terms of the agreements relating to remuneration are set out in the table below:
Maximum Maximum
ESSIP
LTIP
TFR* opportunity
opportunity
Position
Executive
(A$)
(per cent of TFR) (per cent of TFR)
Chief Executive Officer N Power
1,800,000
112.5
150
Chief Financial Officer S Pearce
1,050,000
75
100
Director Development P Meurs
1,050,000
75
100
Director Operations
N Cernotta
950,000
75
100
39
Termination clause
Three months written notice (or three months TFR in lieu)
* Total Fixed Remuneration as of 30 June 2014. Reviewed annually by the R&NC.
All Executives are required to provide written notice of three months to terminate their service agreement.
Should Executives not provide sufficient notice they will forfeit the monetary equivalent (calculated based on TFR)
of any shortfall in the notice period.
If an Executive resigns and leaves the Company prior to 30 June in any year, the Executive will forfeit all entitlement to
any award under the ESSIP. If an Executive retires, is made redundant or leaves the Company as a result of a negotiated
termination, the R&NC Committee at its sole discretion may elect to make a pro-rata ESSIP payment based on service up
to the termination date.
If the Executive resigns and leaves the Company prior to 30 June in the year of vesting under the LTI, the Executive will forfeit
all entitlement to any award under the LTI. If an Executive retires, is made redundant or leaves the Company as a result of a
negotiated termination prior to 30 June in the year of vesting under the LTI, the R&NC Committee at its sole discretion may
elect to make a pro-rata LTI award based on service up to the termination date.
Termination benefits for KMP comply with the limits set by the Corporations Act that do not require shareholder approval.
REMUNERATION REPORT
j) Detailed remuneration for Executives
Executive Remuneration for year ending 30 June 2014
Post employment
End
employee of
Short term employee benefits
Benefits
Service
Share-based payments
Total
Other
Cash ESSIP Non-
ESSIP LTIP
share
salary
cash monetary Superann- Termination share
share
based
and fees value1benefits uation benefits value2value2Options2payments3Total
2014$A
$A
$A$A $A$A$A
$A$A
$A
Executive Directors
N Power
1,775,000
-
4,633 25,000
-
2,415,361 2,147,767 P Meurs
1,025,000 -
4,633
25,000
- 1,016,511
- 45,155
Executives
S Pearce
1,025,000 D Woodall
40
393,350 - 6,367,961
835,244 2,157,179 853,272 5,916,839
6
25,000
-
1,115,217
835,244 -
- 3,045,616
-
10,417
-
96,468 -
-
-
416,130
- 37,884
16,667
277,914
-
-
-
-
725,815
N Cernotta4 251,524 57,721
5
-
ESSIP cash value payable in respect to FY14 to be paid in September 2014.
The estimated fair value was determined using a trinomial option pricing model that takes into account the exercise price,
the term of the option, the impact of dilution, the share price at grant date, expected price volatility of the underlying
share, the effect of additional market conditions, the expected dividend yield, estimated share conversion factor and the
risk free interest rate for the term of the right.
3
Other share based payments relate to financial assistance of way of guarantee to Mr Meurs by The Minderoo Group Pty Ltd
to purchase Fortescue shares under an approved arrangement. The fair value at grant date was determined using a Monte
Carlo simulation model, which takes into account the following inputs: the life of the instruments, the price of the underlying
share, the expected volatility of the underlying share price, the dividends expected on the underlying share, the risk free
interest rate for the life of the instruments, the loan value per share, the interest, fees and charges on the loan and the terms
of the margin call.
4
5
Mr Woodall resigned on 12 December 2013.
6
Once vested, the options are subject to a further share price performance condition. Half of the options require a share
price of $7.00 with the second half requiring a minimum share price of $8.00 before they can be exercised. The exercise
price of each option is $5.00 and the expiry date is May 2015.
1
2
REMUNERATION REPORT
The graph below represents the actual remuneration mix for KMP in 2014:
100%
11%
30%
80%
27%
29%
60%
45%
40%
20%
25%
0%
N Power
TFR
ESSIP (at risk)
49%
38%
30%
51%
16%
35%
14%
S Pearce
P Meurs
LTIP(at risk)
N Cernotta
Options (at risk)
Other (at risk)
Executive Remuneration for year ending 30 June 2013
Post Employment
End
employee of
Short term employee Benefits
Benefits
Service
Total
Other
Cash ESSIP Non-
ESSIP LTIP
share
Salary
Cash monetary Superann- Termination Share
Share
based
and fees value1benefits uation benefits value2value2Options2payments3Total
2013 $A $A $A $A $A $A $A$A $A $A
Executive Directors
N Power
1,768,000 708,770 7,000
25,000
-
820,827 640,466
P Meurs
1,018,000 174,830 7,000
25,000
-
446,894 249,071 5,371,4776853,2728,145,544
25,000
-
319,212 249,071
Executives
S Pearce
-
- 3,970,063
1,018,000 276,617 7,000
J Frankcombe 582,705-
-
14,583
45,532
4
D Woodall5404,817101,7262,917
11,650
-
-
- 1,894,900
-- --
642,820
152,973 64,230
-
- 738,313
ESSIP cash value payable in respect to FY13 was paid in September 2013.
3
Other share based payments relate to financial assistance of way of guarantee to Mr Meurs by The Minderoo Group Pty Ltd to
purchase Fortescue shares under an approved arrangement. The fair value at grant date was determined using a Monte Carlo
simulation model, which takes into account the following inputs: the life of the instruments, the price of the underlying share, the
expected volatility of the underlying share price, the dividends expected on the underlying share, the risk free interest rate for the
life of the instruments, the loan value per share, the interest, fees and charges on the loan and the terms of the margin call.
4
Mr Frankcombe resigned on 26 January 2013.
5
Mr Woodall was appointed on 14 January 2013.
6
Once vested, the options are subject to a further share price performance condition. Half of the options require a share
price of $7.00 with the second half requiring a minimum share price of $8.00 before they can be exercised. The exercise
price of each option is $5.00 and the expiry date is May 2015.
1
2
41
REMUNERATION REPORT
Share-based remuneration
Options over equity instruments granted as remuneration
During the year ending 30 June 2012, the Board of Fortescue Metals Group Limited consented to The Minderoo Group Pty Ltd (formerly
the Metal Group Pty Ltd), an entity controlled by the Chairman, to offer an arrangement to provide financial assistance to allow certain
senior executives of Fortescue to purchase the Company’s shares on market. The arrangement was effected through a number of
separate transactions and appropriate disclosures made via lodgement of an Appendix 3Y as required by the ASX Listing Rules.
The arrangement constitutes a share-based payment transaction and has been measured with reference to the fair value of the
benefit received by the executives and is recognised as an expense on a straight-line basis over a four-year vesting period, in line
with the service conditions. The fair value was determined at grant date using Monte-Carlo simulation model. Total share-based
payment expense in relation to the arrangement for the financial year ended 30 June 2014 was A$925,453 (2013: A$925,453).
The purpose was to provide an opportunity for a limited number of senior individuals critical to Fortescue’s performance
to be incentivised and remunerated through increased direct share ownership (reinforcing alignment with shareholder
interests), and further enhance Fortescue’s ability to retain these individuals over the long term. The offer is provided at no
cost to Fortescue and the Executive is required to arrange their own finance through a third party and is responsible for all
repayments and associated costs.
42
Mr Meurs is a participant in the above financial arrangement. Under this arrangement The Minderoo Group Pty Limited
provided Mr Meurs with financial assistance by way of a guarantee for the acquisition of 16,632,614 ordinary shares in the
Company. The fair value attributed to Mr Meurs in relation to this arrangement for the financial year ended 30 June 2014
was A$853,272(2013: A$853,272).
There are no current plans to offer this arrangement to any additional employees.
Details of share based payments relating to LTI
The following table provides details of the number of share rights granted under the LTI during the financial years ended
30 June 2014 and 30 June 2013. The value of the rights has been determined using the amount of the grant date fair value.
Value per
Performance
Rights
Fair rights at
Name
Grant date
period
granted value1 grant date
%
Performance
Forfeited/
achieved
Vested Lapsed
Max
value
to vest
N Power
16/12/2013 1/7/13 to 30/6/16 853,000 $5.09 $4,341,770
Determined in 2016
n/a
- 2,894,513
10/12/2012 1/7/12 to 30/6/15 545,852 $3.85 $2,101,530 Determined in 2015
n/a
-
700,510
S Pearce
16/12/2013 1/7/13 to 30/6/16 331,723 $5.09 $1,688,470 Determined in 2016
n/a
- 1,125,647
10/12/2012 1/7/12 to 30/6/15 212,276 $3.85 $817,263 Determined in 2015
n/a
-
P Meurs
16/12/2013 1/7/13 to 30/6/16 331,723 $5.09 $1,688,470 Determined in 2016
n/a
- 1,125,647
10/12/2012 1/7/12 to 30/6/15 212,276 $3.85 n/a
-
272,421
n/a
n/a
-
-
n/a
n/a 284,334
-
n/a
n/a
-
N Cernotta
n/a
n/a
-
- $817,263 Determined in 2015
- D Woodall 16/12/2013 1/7/13 to 30/6/16 284,334 $5.09 $1,447,260 8/02/2013 1/7/12 to 30/6/15 83,249 $4.71 $392,103 83,249
272,421
1
REMUNERATION REPORT
Legacy Incentive Option Scheme (IOS)
Details of options over ordinary shares in the Company that were granted under the legacy Incentive Option Scheme (IOS)
as remuneration to KMP are set out below. The plan has now been discontinued; however some grants still remain on foot
and continue to vest.
All options refer to options over ordinary shares of the Company, which are exercisable on a one for one basis under the IOS.
Options granted under the plan carry no dividend or voting rights. When exercisable, each option is convertible into one
ordinary share.
The terms and conditions of each grant of options affecting KMP remuneration in the current or future reporting periods are
set out below.
The IOS provided eligible employees with options subject to share price performance and time conditions determined by
the Board. These awards were typically targeted at KMP at the time of appointment, or to retain selected individuals critical
to the Company’s development. The options typically vested in 3 tranches over a 36 month period.
When exercisable, each option is convertible into one ordinary share of Fortescue Metals Group Limited.
Name
Directors of Fortescue Metals Group Limited
Other key management personnel of the Company
P Meurs1
Number of options vested
20142013
937,5002,187,500
Once vested, the options are subject to a further share price performance hurdle before they can be exercised. Half of the
options require a share price of $7.00 with the second half requiring a share price of $8.00 before they can be exercised.
1 The options were provided at no cost to the recipients. All options expire on the earlier of their expiry date or termination of
the individual’s employment. Once performance hurdles (share price performance and time conditions) are met, the options
are exercisable evenly on an annual basis over the four years from grant date.
The assessed fair value of options at grant date has been included in the remuneration tables above. The estimated fair value
was determined using a trinomial option pricing model that takes into account the exercise price, the term of the option,
the impact of dilution, the share price at grant date, expected price volatility of the underlying share, the effect of additional
market conditions, the expected dividend yield, estimated share conversion factor and the risk free interest rate for the term
of the right.
There were no amendments to the terms and conditions of options awarded as remuneration since their award date.
Exercise of options granted as remuneration
No options were exercised by KMP in FY14.
43
REMUNERATION REPORT
k) Non-Executive director remuneration
Non-Executive director fees are not ‘at-risk’, to reflect the nature of their responsibilities.
Non-Executive directors receive fees for both Board and Committee membership. The payment of additional fees
for serving on a Committee recognises the additional time commitment required by non-Executive directors who serve
on a Committee. The Board Chairman attends all Committee meetings but does not receive any additional fees in addition to Board fees.
The maximum aggregate remuneration payable to non-Executive directors is $2.0 million, which was approved by
shareholders at the annual general meeting on 19 November 2010. There have been no changes to the aggregate fee pool
since November 2010. The Board will not seek any increase to this fee pool at the 2014 AGM.
44
Position Fee (A$)
Board Chairman*
120,000
Board Deputy Chairman
210,000
140,000
Audit & Risk Management Committee Chairman
40,000
Audit & Risk Management Committee Member
15,000
Remuneration & Nomination Committee Chairman 15,000
Remuneration & Nomination Committee Member
7,500
China Advisory Group Board of Representatives
60,000
Finance Sub-Committee Member
6,000
* The Board Chairman has elected to receive an annual fee significantly below market and other Fortescue director norms.
As confirmed by Egan Associates, in aggregate, each individual non-Executive directors’ total fees are below the market
median for non-Executive directors of similarly sized companies (e.g. companies ranked on the ASX50 or ASX100 Resources).
Non-executive directors do not receive retirement benefits, nor do they participate in any incentive programs of the Company.
The remuneration of non-Executive directors for the year ended 30 June 2014 and 30 June 2013 is detailed on the
following page.
Committee Other
2014
Base fees
fees
benefits
Superannuation
Total
$A $A$A $A$A
A Forrest108,884
6,806 8,250 11,858135,798
H Elliott
195,159
6,806
-
21,118
223,083
G Rowley
127,032
22,228
2,323
15,299
166,882
G Brayshaw 52,958 11,732
- 4,13668,826
O Hegarty
127,032
6,806
-
13,718
147,556
C Huiquan
140,000
-
-
-
140,000
G Raby
140,000
60,000
-
-
200,000
H Scruggs
133,098
17,750
-
-
150,848
M Barnaba
127,032
47,253
-
17,864
192,149
E Gaines
126,332
15,873
-
14,648
156,853
1
S Warburton280,336 8,608
1
2
G Brayshaw retired on 13 November 2013.
S Warburton was appointed 13 November 2013.
- 9,11798,061
REMUNERATION REPORT
Committee Other
2013
Base fees
fees
benefits
Superannuation
Total
$A $A$A $A$A
A Forrest 109,091 6,818 11,093 11,591138,593
H Elliott
190,909
6,818
-
19,773
217,500
G Rowley
127,273
13,636
7,000
14,091
162,000
G Brayshaw
127,273
41,519
-
16,909
186,001
K Ambrecht1 52,03710,593
-
O Hegarty
-
127,273
6,818
- 62,630
13,409
147,500
C Huiquan2 - -- - G Raby
140,000
60,000
-
-
200,000
H Scruggs
140,000
22,500
-
-
162,500
M Barnaba
127,273
32,727
-
16,000
176,000
E Gaines3
44,865
-
- 4,48749,352
Mr Ambrecht retired on 14 November 2012.
Mr Cao Huiquan elected not to receive Directors fees for his role as Hunan Valin’s representative on the Fortescue Board.
3
Ms Gaines was appointed on 22 February 2013.
1
2
l) Equity Instrument disclosures relating to key management personnel
Options and Performance Rights
The movement during the reporting period in the number of options and performance rights over ordinary shares in the Company
held directly, indirectly or beneficially, by each of the Key Management Personnel, including their related parties is as follows:
2014
Name
Balance at
the start
Exercised Forfeited
of the year Granted1
/ converted
/ lapsed
45
Balance at the end of Not
the year
Vested
Unvested
exercisable
Directors of Fortescue
A Forrest-
----
-
-N Power
341,158
1,902,138
(143,291) (61,403) 2,038,602
-
2,038,602
2,038,602
G Rowley-
----
-
-H Elliott -
----
-
-G Brayshaw2
-
----
-
-O Hegarty
-
----
-
-M Barnaba
-
----
-
-C Huiquan
-
----
-
-H Scruggs
-
----
-
-G Raby -
----
-
-E Gaines-
----
-
-S Warburton
-
----
-
-P Meurs
7,664,514
739,722
(82,472) (28,973) 8,292,791 7,500,000
792,791
8,292,791
792,791
792,791
Other key management personnel of Fortescue
S Pearce
132,673
N Cernotta
739,721
(55,923) -
30,527
D Woodall252,032453,395
(23,680) -
(20,566) 792,791
-
-30,527 -
30,52730,527
(484,861) -
-
-
-
Performance Rights were granted in accordance with the short term and long term performance rights plans, as disclosed
in note 30 of the financial accounts.
2
Mr Brayshaw and Mr Woodall ceased employment during the 2014 financial year.
1
REMUNERATION REPORT
2013
Name
Balance at
the start
Exercised Forfeited
of the year Granted1
/ converted
/ lapsed
Balance at the end of Not
the year
Vested
Unvested
exercisable
A Forrest-
----
-
-N Power
419,255
341,158
(245,369) (173,886) 341,158
-
341,158
341,158
G Rowley-
----
-
-H Elliott -
----
-
-K Ambrecht2
-
----
-
-G Brayshaw
-
----
-
-O Hegarty
-
----
-
-M Barnaba
-
----
-
-C Huiquan
-
----
-
-H Scruggs
-
----
-
-G Raby -
----
-
-E Gaines-
----
-
-P Meurs
7,614,131
164,514
(53,242) (60,889) 7,664,514 6,562,500 1,102,014
7,664,514
S Pearce
81,522
132,673
(53,316) (28,206) 132,673
-
132,673
132,673
D Woodall
-
52,032
-
-52,032 -
52,03252,032
J Frankcombe237,076 132,673
(23,398) (146,351) -
-
-
-
46
Performance Rights were granted in accordance with the short term and long term performance rights plans, as disclosed
2
Mr Ambrecht and Mr Frankcombe ceased employment during the 2013 financial year.
1
Share holdings (Ordinary Shares)
The numbers of shares in the Company held during the financial year by each Director of Fortescue and other key
management personnel of the Groups, including their related parties, are set out below:
2014
Received
Held at
on conversion
Held at
Name
1 July 2013
rights
Issued
Purchases
Sales
Transfers
Other1
30 June 2014
A Forrest
1,020,690,915
--
12,788,332-
-
-
1,033,479,247
N Power
1,111,690
143,291---
-
-
1,254,981
G Rowley
17,644,951
----
-
-
17,644,951
H Elliott
2,167,938
----
-
-
2,167,938
G Brayshaw2
52,149
----
-
(52,149)O Hegarty
40,000
----
-
-
40,000
M Barnaba
-
----
-
-C Huiquan
-
----
-
-H Scruggs
-
----
-
-G Raby
8,000
----
-
-
8,000
E Gaines
-
-
-50,000
- - -50,000
S Warburton
-
----
-
-P Meurs
25,924,523
82,472---
-
-
26,006,995
S Pearce
382,304
55,923
-
21,745
(175,000)
-
-
284,972
N Cernotta
-
----
-
-D Woodall2
-20,566
---
-
(20,566)Performance Rights were granted in accordance with the short term and long term performance rights plans, as disclosed
2
Mr Brayshaw and Mr Woodall ceased employment during the 2014 financial year.
1
REMUNERATION REPORT
2013
Received
Held at
on conversion
Held at
Name
1 July 2012
rights
Issued
Purchases
Sales
Transfers
Other1
30 June 2013
A Forrest
1,010,690,915
--
10,000,000-
-
-
1,020,690,915
N Power
866,321
245,369---
-
-
1,111,690
G Rowley
18,144,951
----
(500,000) -
17,644,951
H Elliott
2,167,938
----
-
-
2,167,938
K Ambrecht2
5,183,030
----
-
(5,183,030) G Brayshaw
52,149
----
-
-
52,149
O Hegarty
40,000
----
-
-
40,000
M Barnaba
-
----
-
-C Huiquan
-
----
-
-H Scruggs
-
----
-
-G Raby
-
-
-8,000
- -
-8,000
E Gaines-
----
-
-P Meurs
25,871,281
53,242---
-
-
25,924,523
S Pearce
328,988
53,316---
-
-
382,304
D Woodall
-
----
-
-J Frankcombe2
19,571
23,398---
-
(42,969) Performance Rights were granted in accordance with the short term and long term performance rights plans, as disclosed
2
Mr Ambrecht and Mr Frankcombe ceased employment during the 2013 financial year.
1
47
AUDITOR’S INDEPENDENCE DECLARATION
48
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
49
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
50
DIRECTORS’ DECLARATION
In the Directors’ opinion:
(a)the financial statements and notes set out on pages 52 to 96 are in accordance with the Corporations Act 2001,
including:
(i)complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional
reporting requirements, and
(ii)giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its
performance for the year ended on that date, and
(b)there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become
due and payable, and
(c)at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed
group identified in note 28 will be able to meet any obligations or liabilities to which they are, or may become,
subject by virtue of the deed of cross guarantee described in note 28.
Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by
the International Accounting Standards Board.
The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section
295A of the Corporations Act 2001.
51
This declaration is made in accordance with a resolution of the Directors.
Mr Andrew Forrest
Chairman
Dated in Perth this 20th day of August 2014.
CONSOLIDATED INCOME STATEMENT AND CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
Consolidated income statement
Notes
20142013
US$m
US$m
3
11,753
8,120
Cost of sales
5
(7,002)
(5,140)
Gross profit
4,751
2,980
Other income
4
126
291
Other expenses
6
(244)
(252)
Profit before income tax and net finance expenses
4,633
3,019
21
33
Finance income
7
Finance expenses
7
(741)
(586)
3,913
2,466
Income tax expense
8
(1,173)
(720)
Profit for the year after income tax
2,740
1,746
Profit for the year is attributable to:
Equity holders of the Company
52
2,730
1,746
Non-controlling interest
10
-
2,740
1,746
20142013
Consolidated statement of comprehensive income
Notes
US$m
US$m
2,740
1,746
Other comprehensive income
Items that may be reclassified to profit or loss
Gains (losses) on cash flow hedges taken to equity
21(a)
23
(80)
Losses (gains) transferred to the initial carrying amount of hedged items
21(a)
67
(35) Foreign exchange gain on translation of foreign operations
21(a)
2
-
2,832
1,631
Total comprehensive income for the year, net of tax
Total comprehensive income for the year is attributable to:
Equity holders of the Company
2,822
1,631
10
-
2,832
1,631
Notes CentsCents
Earnings per share for profit attributable to the ordinary
equity holders of the Company:
Basic earnings per share
29(a)
88.00
Diluted earnings per share
29(a)
87.8556.05
56.07
The above consolidated income statement and consolidated statement of comprehensive income should be read in conjunction
with the accompanying notes.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 June 2014
20142013
NotesUS$mUS$m
Assets
Current assets
Cash and cash equivalents
9
2,398
2,158
Trade and other receivables
10
585
409
Inventories
11 1,467961
Other current assets
12
27
36
Current tax receivable
-
8
Total current assets
4,477
3,572
Non-current assets
10
5
6
Property, plant and equipment
13
18,068
17,159
Intangible assets
14
67
40
Other non-current assets
12
77
90
Total non-current assets
18,217
17,295
Total assets
22,694
20,867
Liabilities
Current liabilities
53
Trade and other payables
15
1,338
1,043
Deferred income
16
936
38
Borrowings and finance lease liabilities
17
154
205
Provisions
18
176128
Current tax payable
666
-
Total current liabilities
3,270
1,414
Non-current liabilities
15
Deferred income
16
556
331
17
9,403
12,486
Provisions
18
Deferred joint venture contributions
Deferred tax liabilities
101
155
467387
160
-
19
1,154
805
Total non-current liabilities
11,841
14,164
Total liabilities
15,111
15,578
Net assets
7,583
5,289
1,289
1,291
Equity
Contributed equity
20(b)
Reserves
21(a) 69(49)
Retained earnings
6,211
4,043
Equity attributable to equity holders of the Company
7,569
5,285
14
4
Total equity
7,583
5,289
The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
CONSOLIDATED STATEMENT OF CASH FLOWS
20142013
Notes US$mUS$m
Cash flows from operating activities
Cash receipts from customers
12,618
8,725
Payments to suppliers and employees
(6,220)
(5,026)
Income tax paid
Net cash inflow from operating activities
31
(150)
(695)
6,248
3,004
Cash flows from investing activities
Payments for property, plant and equipment - Fortescue
(1,931)
(6,355)
Payments for property, plant and equipment - joint operations
(64)
-
Receipts of deposits and guarantees
160
3
Proceeds from disposal of plant and equipment and sale of jointly controlled assets
262
155
Other
Net cash outflow from investing activities
18131
(1,392)
(6,166)
Cash flows from financing activities
54
Proceeds from borrowings and finance leases
-
7,330
Repayment of borrowings and finance leases
(3,092)
(3,232)
Interest and finance costs paid
(853)
(893)
Dividends paid
(581)
(131)
Repayment of customer deposits
(82)
(80)
Purchase of shares by employee share trust
(17)
(20)
Transactions with non-controlling interest
-
15
Net cash (outflow) inflow from financing activities
(4,625)
2,989
Net increase (decrease) in cash and cash equivalents
231
Cash and cash equivalents at the beginning of the financial year
2,158
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the financial year
9
(173)
2,343
9
(12)
2,398
2,158
Non-cash investing and financing activities 31
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity holders of the Company
Non-conContributed
Retained
trollingTotal
equity Reserves earnings Total interestequity
US$m US$m US$m US$m US$mUS$m
Balance at 1 July 2012
1,293
41
2,428
3,762
-
3,762
Profit for the year
-
-
1,746
1,746
-
1,746
-
(115)
-
(115)
-
(115)
-
(115)
1,746
1,631
-
1,631
Transactions with owners in their capacity as owners, net of tax:
Purchase of shares under employee share plans
(20)
Employee share awards exercised net of employee contributions
-
-
(20)
-
(20)
18
-
-
18
-
18
Equity settled share-based payment transactions
-
14
-
14
-
14
Dividends paid
-
-
11
-
11
4
15
Balance at 30 June 2013
1,291
(49)
4,043
5,285
4
5,289
Balance at 1 July 2013
-(131)
(131) -(131)
1,291
(49)
4,043
5,285
4
5,289
Profit for the year
-
-
2,730
2,730
10
2,740
-
92
-
92
-
92
-
92
2,730
2,822
10
2,832
Transactions with owners in their capacity as owners, net of tax:
(17)
-
-
(17)
-
(17)
15
(5)
-
10
-
10
Equity settled share-based payment transactions
-
31
-
31
-
31
Dividends paid
-
1,289
-(562)
(562) -(562)
69
6,211
7,569
14
7,583
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
55
CONTENTS TO THE NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
56
1
Basis of preparation
57
2
Segment information
58
3
58
4
Other income
59
5
Cost of sales
59
6
Other expenses
59
7
Finance income and finance expenses
60
8
Income tax expense
60
9
61
10 Trade and other receivables
61
11Inventories
62
12 Other assets
62
13 Property, plant and equipment
63
14 Intangible assets
64
15 Trade and other payables
64
16 Deferred income
64
17 Borrowings and finance lease liabilities
65
18Provisions
68
19 Deferred tax assets and liabilities
69
20 Contributed equity
70
21Reserves
70
22Dividends
71
23 Remuneration of auditors
72
24Contingencies
72
25Commitments
72
26 Related party transactions
73
27 Interests in other entities
74
28 Deed of cross guarantee
75
29 Earnings per share
75
30 Share-based payments
76
31 Reconciliation of profit after income tax
to net cash inflow from operating activities
78
32 Parent entity financial information
79
33 Events occurring after the reporting period
80
34 Financial risk management
80
35 Summary of significant accounting policies
84
36 Critical accounting estimates and judgements
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of preparation
These financial statements cover the consolidated group consisting of Fortescue Metals Group Limited (the Company) and
its subsidiaries, together referred to as Fortescue or the Group.
These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other
authoritative pronouncements of the Australian Accounting Standards Board (AASB), including Australian Interpretations,
and the Corporations Act 2001.
(a) Compliance with IFRS
The consolidated financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board.
(b) Historical cost convention
These financial statements have been prepared under the historical cost convention, except for certain financial instruments,
which have been measured at fair value.
(c) Functional and presentation currency
The financial statements are presented in United States dollars, which is the Group’s reporting currency and the functional
currency of the parent and the majority of its subsidiaries.
(d) Critical accounting estimates
The preparation of financial statements requires management to use certain critical accounting estimates and to exercise
their judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to these financial statements are:
•
Income taxes
•
Iron ore reserve estimates
•
Exploration and evaluation expenditure
•
Development expenditure
•
Property, plant and equipment – recoverable amount
•
Rehabilitation estimates
The accounting estimates and judgements applied to these areas are disclosed in note 36.
(e) Rounding of amounts
The Company is of a kind referred to in Class order 98/100, issued by the Australian Securities and Investments Commission,
relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in
accordance with that Class Order to the nearest million dollars, unless otherwise stated.
57
2 Segment information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating
decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance
of the operating segments, has been identified as the Chief Executive Officer.
The internal reporting is provided to the chief operating decision maker on a consolidated basis. No operating segments
have been aggregated to form the above consolidated information.
Fortescue uses earnings before interest, tax, depreciation and amortisation (EBITDA) as a key measure of its financial
performance. The reconciliation of EBITDA to the net profit after tax is presented below.
2014 2013
Note
EBITDA
3,575
Finance income
7
21
33
Finance expenses
7
(741)
(586)
4
-
23
58
US$mUS$m
5,636 5,6
(965) (463)
Assets write-off
6
(22)
(71)
6
(16) (45)
Net profit before tax
3,913
2,466
Income tax expense
8
(1,173)
(720)
Net profit after tax
2,740
1,746
(a) Geographical information
Fortescue operates predominantly in the geographical location of Australia, and this is the location of the vast majority
of the Group’s assets. In presenting information on the basis of geographical segments, segment revenue is based on the
geographical location of customers.
2014
US$m
2013
US$m
Revenues from external customers
China11,315 7,933
Other438187
11,7538,120
(b) Major customer information
Revenue from one customer amounted to US$2,347 million (2013: US$1,274 million), arising from the sale of iron ore and
related shipment of the product.
3 Operating sales revenue
2014
US$m
2013
US$m
Sale of iron ore
11,485
7,889
Sale of joint venture iron ore
126
168
Other revenue
142
63
11,753
8,120
4 Other income
2014
US$m
2013
US$m
Gain on disposal of assets and interest in joint venture
109
124
Net foreign exchange gain
-
96
-
34
-
23
Other1714
126291
5 Cost of sales
2014
US$m
2013
US$m
Mining costs3,4422,851
Rail costs238182
Port costs252181
Operating leases
74
133
Shipping costs
1,210
769
Government royalty775499
924
437
Other operating expenses
87
88
7,0025,140
(i) Total employee benefits expense included in cost of sales and administration expenses is US$675 million
(2013: US$635 million).
6 Other expenses
2014
US$m
2013
US$m
Administration expenses112110
Net foreign exchange loss
53
-
41
26
Assets write-off2271
16
45
244252
59
7 Finance income and finance expenses
2014
US$m
2013
US$m
Net finance expenses
Finance income
Interest income2133
2133
Finance expenses
Interest expense on borrowings and finance lease liabilities
747
892
Interest capitalised (i)
(75)
(342)
Loss on early redemption of borrowings and finance leases
53
-
Other1636
60
741586
Net finance expenses
720
553
(i) For specific borrowings, interest has been capitalised at the rate of interest applicable to specific borrowings that
finance assets under construction, net of interest income from temporary investments on these borrowings. For
general borrowings, the interest capitalised is calculated using a weighted average of rates applicable to relevant
general borrowings during the period. For the year ended 30 June 2014, the capitalisation rate used for specific
borrowings was 6.88 per cent (2013: 6.88 per cent) and 6.90 per cent (2013: 7.09 per cent) for general borrowings.
8 Income tax expense
(a) Income tax expense
2014
US$m
2013
US$m
Current tax824136
Deferred tax349584
1,173720
(b) Numerical reconciliation of income tax expense to prima facie tax payable
2014
US$m
2013
US$m
3,913
2,466
Tax at the Australian tax rate of 30 per cent (2013: 30 per cent)
1,174
740
Research and development
9
(20)
Adjustments in respect of income tax expense of prior periods
2
(5)
Foreign exchange variations and other translation adjustments
(11)
9
Tax impact of overseas jurisdiction
(9)
-
Share-based payments(1)2
Net tax outcome of internal restructure
-
1
Other 9(7)
Income tax expense
1,173
720
8
Income tax expense (continued)
(c) Tax consolidation legislation
The Company and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation.
The accounting policy in relation to this legislation is set out in note 35(g).
On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing
agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities in the case
of a default by the head entity, Fortescue Metals Group Limited.
The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate the
Company for any current tax payable assumed and are compensated by the Company for any current tax receivable and
deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Company under the tax
consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the whollyowned entities’ financial statements.
The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the
head entity. The Company may also require payment of interim funding amounts to assist with its obligations to pay tax
instalments. The funding amounts are recognised as non-current intercompany receivables or payables.
(d)MRRT
On 19 March 2012, the Australian Government passed through the Senate, the Minerals Resource Rent Tax Act 2012, with
application to certain profits arising from the extraction of iron ore and coal in Australia. MRRT is considered to be income
tax for Australian accounting purposes, is imposed on a project-by-project basis to upstream operations only and is applied
from 1 July 2012. The effective tax rate is 22.5 per cent. At 30 June 2014, the Group had a net deferred tax asset balance of
US$4,265 million (2013: US$3,765 million) in relation to MRRT, and it is not probable that future taxable amounts will be
available for their offset. Accordingly, these deferred tax assets have not been recognised.
9 Cash and cash equivalents
2014
US$m
Cash at bank
1,541
690
857
1,468
Short term deposits
2013
US$m
2,3982,158
10 Trade and other receivables
2014
US$m
2013
US$m
Trade debtors – iron ore
486
145
Trade debtors – other
44
26
GST receivables3946
Security deposits
1
166
Other receivables1526
Total current receivables
585
409
Other receivables56
Total non-current receivables
5
6
61
10 Trade and other receivables (continued)
The carrying value of the receivables approximates their fair value. Information about Fortescue’s exposure to foreign currency
risk, interest rate risk and price risk are disclosed in note 34.
Disclosures relating to receivables from related parties are set out in note 26.
At 30 June 2014, trade receivables of US$9 million (2013: US$4 million) were past due but not impaired. These relate to a number
of customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:
2014
US$m
2013
US$m
Less than 30 days
7
2
Between 30 and 60 days
1
1
Beyond 60 days
1
1
94
Receivables that are classified as past due are those that have not been settled within the normal terms and conditions that have
been agreed with the customer. None of the receivables past due in the above table are impaired.
62
All other receivables within trade and other receivables are not impaired as it is expected that these amounts will be received
when due.
11Inventories
2014
US$m
Iron ore stockpiles
1,055
2013
US$m
646
Warehouse stores and materials412315
1,467 961
Iron ore stockpiles, warehouse stores and materials are stated at cost. Inventories expensed through cost of sales, including
depreciation, during the year ended 30 June 2014 amounted to US$4,930 million (2013: US$3,784 million).
12 Other assets
2014
US$m
2013
US$m
Prepayments2718
Other -18
Total other current assets
27
36
Prepayments7790
Total other non-current assets
77
90
13 Property, plant and equipment
Plant LandExploration Assets
andandandunder
equipment buildings evaluationdevelopment Development Total
Notes
US$mUS$mUS$m US$m US$m
US$m
Year ended 30 June 2013
Opening net book value
2,771
127
280
5,930
2,249
11,357
Transfers of assets
6,025
520
(51)
(6,959)
424
(41)
Additions 224
-
Capitalised interest
Foreign exchange gains reclassified from reserves
67 6,101
-
-
-
342
-
342
21
-
-
-
(35)
-
(35)
Disposals(43) (3) (2)
Depreciation(358) (12)
-
Changes in restoration and rehabilitation estimate
Assets written off
26,394
7
- (19) (67)
(76) (97) (543)
18
-
-
-
-
(132)
(132)
6
(71)
-
-
-
-
(71)
Other (1) -(30) (13) (1)(45)
Closing net book value
8,547
632
264
5,290
2,426
17,159
At 30 June 2013
Cost
264
5,290
Accumulated depreciation
9,397
(850)
668
(36)
-
-
2,702
(276)
18,321
(1,162)
Net book value
8,547
632
264
5,290
2,426
17,159
Year ended 30 June 2014
8,547
632
264
5,290
2,426
17,159
Transfers of assets
4,885
345
50
(6,972)
1,624
(68)
Additions 12
-
Capitalised interest
99 1,842
21,955
7
-
-
-
75
-
75
Foreign exchange losses reclassified from reserves 21
-
-
-
67
-
67
Disposals(139)
(1)
-
(14) (154)
Depreciation (847) (47)
-
-
(136)(1,030)
Changes in restoration and rehabilitation estimate 18
Assets written off
6
-
-
-
-
-
87
87
(22)
-
-
-
-
(22)
Other(6) 3 (4) 11 (5) (1)
12,430
933
408
313
3,984
18,068
At 30 June 2014
Cost14,090 1,013
408
313
4,397 20,221
Accumulated depreciation
(1,660)
(80)
-
-
(413)
(2,153)
Net book value
12,430
933
408
313
3,984
18,068
Transfers of assets were made between the categories of property, plant and equipment, intangible assets and exploration,
evaluation and development expenditure.
Property, plant and equipment includes assets held under finance leases of US$300 million (2013: US$662 million).
The details of the finance leases under which these assets are held are disclosed in note 17.
63
14 Intangible assets
2014
US$m
2013
US$m
40
19
Transfers of assets
68
41
Amortisation (41)(20)
67
40
Cost
136
68
Accumulated amortisation
(69)
(28)
Closing net book value6740
15 Trade and other payables
2014
US$m
2013
US$m
Trade payables397372
Customer deposits6573
64
Other payables and accruals
876
598
Total current payables
1,338
1,043
Customer deposits
55
129
Other payables and accruals
46
26
Total non-current payables101155
16 Deferred income
2014
US$m
2013
US$m
Iron ore prepayments825 38
Port access prepayment
111
-
Total current deferred income
936
38
Iron ore prepayments
223
331
Port access prepayment
333
-
Total non-current deferred income
556
331
17 Borrowings and finance lease liabilities
2014
US$m
2013
US$m
79
121
73
52
Finance lease liabilities
2
29
Preference shares
-
3
Total current borrowings and finance lease liabilities
154
205
4,366
6,970
4,722
4,776
Finance lease liabilities
315
613
Preference shares
-
127
Total non-current borrowings and finance lease liabilities
9,40312,486
Total borrowings and finance lease liabilities 9,55712,691
(a) Summary of movements in borrowings and finance lease liabilities
Senior
Senior secured Finance
UnsecuredUnsecured
unsecuredcredit leases/ Preference loan
bank
notes facilityfacilities shares notes facility Total
US$m US$m US$m US$m US$m US$mUS$m
30 June 2013
Balance at 1 July
Initial recognition
7,082
-
281
141
897
100
8,501
-
4,844
1,502
-
-
1,230
7,576
Interest expense
510
206741374 15
892
Interest and finance lease repayments
(501)
(184)
-
-
Foreign exchange gain
-
-
Repayment
-
7,091
(66)
(13)
(117)
(12)
(893)
-
-
(34)
-
(34)
(39)
(11)
-
-
(50)
(38) (1,110)
4,828
642
-
130
(820)
-
(1,333)(3,301)
-
12,691
30 June 2014
Balance at 1 July
Initial recognition
7,091
4,828
642
130
-
-
12,691
-
-
13
-
-
-
13
Interest expense
437
248
57
5
-
-
747
Interest and finance lease repayments
(465)
(209)
(53)
(7)
-
-
(734)
22
(22)
(59)
-
-
-
(59)
(10)
3
(7)
Transaction costs
Foreign exchange (gain) loss
-
Repayment
(2,640)
4,445
-
(50)
4,795
-
-
(273) (131)
-
-(3,094)
317
-
-
-
9,557
Information about Fortescue’s exposure to interest rate risk and foreign exchange rate risk is disclosed in note 34.
65
17 Borrowings and finance lease liabilities (continued)
(b) Debt reduction program
During the year ended 30 June 2014, Fortescue commenced an accelerated debt reduction program, and successfully
completed the following initiatives:
• Redemption of A$140 million preference shares, completed in November 2013;
• Redemption of US$2.04 billion 2015 senior unsecured notes, completed in December 2013 (US$1.0 billion) and
March 2014 (US$1.04 billion);
• Pay-out of finance lease liabilities of US$0.3 billion in January 2014; and
• Redemption of the US$0.6 billion 2016 senior unsecured notes, completed in March 2014.
(c) Refinancing
In November 2013 Fortescue successfully completed the refinancing of the US$5.0 billion term loan, reducing the margin by
one per cent to 3.25 per cent, and extending the maturity date by 21 months to 30 June 2019. The total coupon payable on this
facility is calculated as LIBOR, with a LIBOR floor of 1.00 per cent, plus the margin. In May 2014, the margin reduced by a further
0.50 per cent, to 2.75 per cent.
66
(d) Key terms of borrowings and finance lease liabilities
The key terms of borrowings and finance lease liabilities are summarised below.
(i) Senior unsecured notes
The Group’s senior unsecured notes are held in its wholly-owned subsidiary FMG Resources (August 2006) Pty Limited and
comprise the following tranches which have early repayment options with interest payable bi-annually:
Date of issue
Date of maturity
Call date (i)
15 December 2010
1 February 2018
Current
25 October 2011
1 November 2019
19 March 2012
1 April 2017
19 March 2012
1 April 2022
April 2017
Face value Carrying value
922
6.875%
USD
November 2015
1,500
1,506
8.250%
USD
April 2015
1,000
1,009
6.000%
USD
1,000
1,008
6.875%
USD
4,400
4,445
(i)
Interest rate Currency
900
The date when senior unsecured notes become repayable at Fortescue’s option.
(ii) Senior secured credit facility
Fortescue established a senior secured credit facility of US$5.0 billion in October 2012, which is repayable at Fortescue’s
option. The facility was refinanced in November 2013. The key terms of the facility prior to and after refinancing are
summarised below.
From To
US$m
Interest rate (i)
Principal repayments
October 2012 November 2013
5,000
LIBOR + 4.25%
0.25% quarterly
18 October 2017
November 2013 May 2014
4,950
LIBOR + 3.25%
0.25% quarterly
30 June 2019
May 2014 4,925
LIBOR + 2.75%
0.25% quarterly
30 June 2019
(i)
Current
Maturity
LIBOR with a floor of one per cent.
The facility is secured by a first priority perfected lien on all of the assets of the Company and certain of its subsidiaries
subject to certain limited exceptions.
17 Borrowings and finance lease liabilities (continued)
(iii) Finance lease liabilities
During the year, Fortescue repaid the finance lease liabilities associated with both Ore Processing Facilities (OPFs)
at Christmas Creek. The Group’s finance lease liabilities at 30 June 2014 largely relate to contractual commitments associated
with the Solomon Power Station.
In the event of default, the assets revert to the lessor. The future minimum lease payments represent the Group’s
commitments in relation to finance leases. Finance lease liabilities include the effect of discounting as summarised below:
Between
Within
one year
one
and five
year
years
US$m US$m
After
five
years Total
US$m US$m
30 June 2013
Future minimum lease payments
95
393
972
1,460
Effect of discounting
(72)
(263)
(483)
(818)
Present value of minimum lease payments
23
130
489
642
30 June 2014
Future minimum lease payments
40
208
674
922
Effect of discounting
(40)
(199)
(366)
(605)
308
317
Present value of minimum lease payments
-
9
(iv) Preference shares
In September 2008 Fortescue issued 1,400 fully paid non-convertible redeemable preference shares at A$100,000 per share,
with a term of 8.5 years. The preference shares had a dividend coupon rate of nine per cent payable bi-annually either in
cash or by issue of additional preference or ordinary shares, as elected by Fortescue. A holder of preference shares was not
entitled to share in the distribution of any surplus assets of the Company beyond its redemption amount. The preference
shares ranked in priority to Fortescue’s ordinary shares for the payment of distributions, had limited voting rights, and were
repayable at Fortescue’s option.
Fortescue redeemed the preference shares in full in November 2013.
67
18Provisions
2014
US$m
2013
US$m
Employee benefits166121
Restoration and rehabilitation
10
7
Total current provisions
176
128
Employee benefits46
Restoration and rehabilitation
463
381
Total non-current provisions
467
387
(a) Provision for employee benefits
Movements in the provision for employee benefits during the financial year are set out below:
Carrying amount at 1 July
68
2014
US$m
2013
US$m
127102
Changes in employee benefits provision
167
122
Amounts paid
(124)
(97)
Carrying amount at 30 June
170127
(b) Provision for restoration and rehabilitation
Movements in the provision for restoration and rehabilitation during the financial year are set out below:
2014
US$m
Carrying amount at 1 July
388
2013
US$m
514
Changes in restoration and rehabilitation estimate 87(132)
(i)
Unwinding of discount
4
7
Payments for restoration and rehabilitation activities
(6)
(1)
Carrying amount at 30 June
(i)
473388
A provision for restoration and rehabilitation has been recognised in relation to Fortescue’s iron ore operations.
The provision has been made in full for all disturbed areas at the reporting date based on current estimates of
costs to rehabilitate and for the costs of infrastructure removal, discounted to their present value based on expected
timing of future cash flows.
19 Deferred tax assets and liabilities
The composition and movement of deferred tax assets and (liabilities) is as follows:
Charged/ Charged/ Balance (credited) Charged/ Balance (credited) Charged/ Balance
1 July
to profit (credited) 30 June to profit (credited) 30 June
2012
or loss to equity
2013
or loss to equity 2014
US$m US$m US$m US$m US$m US$mUS$m
Exploration expenditure(80) 1
- (79) (4) -(83)
Development(353)160
- (193)(270)
-(463)
-
-
(54)
(531)
(585)
(93)
(678)
Consumables (44) (81)
- (125) (60)
-(185)
Foreign exchange losses (gains) -
-
7
(38)
(31)
22
(9)
Senior notes(6)
6 - ---Unsecured loan notes
204
(204) - ---Accruals1 - - 1 - -1
Provisions184 (27)
- 157 35
-192
Other financial liabilities
(80)
116
-
36
28
-
64
Other items
-
14
-
14
(7)
-
7
(221) (584)
Exploration expenditure
Development
-
(805) (349)
-(1,154)
Assets
Liabilities
Net assets (liabilities)
201420132014201320142013
US$mUS$mUS$mUS$mUS$mUS$m
-
-
19
- (83) (79)(83)
75 (463) (268)(463)
(193)
54
(585)
(697)
(639)
(678)
Consumables
-
- (185) (125)(185)
Foreign exchange losses (gains) -
2
Accruals
Provisions
(79)
(9)
(33)
(9)
23 15 (22)(14) 1
195 157
(3)
-192
(125)
(31)
1
157
Other financial liabilities
92
95
(28)
(59)
64
36
Other items
10
21
(3)
(7)
7
14
339
419
(1,493) (1,224)(1,154)
(805)
Deferred tax assets (liabilities) expected to
be recovered (settled) within 12 months
76
46
(223)
(165)
(147)
(119)
Deferred tax assets (liabilities) expected to
be recovered (settled) beyond 12 months
263
373
(1,270)
(1,059)
(1,007)
(686)
69
20 Contributed equity
(a) Share capital
30 June
2014
Number
Ordinary shares fully paid
30 June
2013
Number
3,113,798,1513,113,798,151
(b) Movements in ordinary share capital
Date
Details
1 July 2012 Opening balance
Issue
price
3,113,798,151
US$m
1,293
(4,001,750)
$4.95
(20)
4,001,750
$4.45
18
30 June 2013 Closing balance
3,113,798,151
1,291
1 July 2013 Opening balance
3,113,798,151
1,291
30 June 2014 Closing balance
70
Number of shares
(3,605,211)
$4.63
(17)
3,605,211
$4.23
15
3,113,798,151
1,289
(c) Ordinary shares
Fully paid ordinary shares entitle the holder to participate in dividends and to one vote per share at meetings of the
Company. Ordinary shares participate in the proceeds on winding up of the Company in proportion to the number of
shares held.
21Reserves
(a)Reserves
Share-based payments reserve
2014
US$m
55
2013
US$m
29
Capital reserve1212
Foreign currency translation
Hedging reserve
2
-
69
(90)
(49)
Share-based payments reserve
Balance at 1 July
29
15
Exercised or converted
(5)
-
Forfeited or lapsed
(5)
-
Share-based payment expense
36
14
Balance at 30 June
5529
Capital reserve
Balance at 1 July
12
1
-
11
Balance at 30 June1212
21 Reserves (continued)
2014
US$m
2013
US$m
Foreign currency translation reserve
Balance at 1 July
-
-
Currency translation differences arising during the year
2
-
Balance 30 June
2
-
Balance at 1 July
(90)
25
Gains (losses) on cash flow hedges taken to equity
23
(80)
Losses (gains) transferred to the initial carrying amount of hedged items
67
(35)
Balance at 30 June
-
(90)
Hedging reserve
(b) Nature and purpose of reserves
(i) Share-based payments reserve
The share-based payments reserve primarily records items recognised as expenses on valuation of employee share
options and rights.
(ii) Capital reserve
The capital reserve records equity contributions by the holder of the non-controlling interest and revaluations of
non-current assets held at fair value.
(iii) Foreign currency translation reserve
The foreign currency translation reserve comprises all foreign currency differences arising from the translation of the
financial statements of foreign operations.
71
(iv) Hedging reserve
The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges.
The cumulative deferred gain or loss on the hedge is recognised as an adjustment to the initial cost of non-financial
hedged items.
22Dividends
(a) Dividends paid during the year
2014
US$m
2013
US$m
Final fully franked dividend for the year ended 30 June 2013: A$0.10 per share
(30 June 2012: A$0.04 per share)
282
131
280
-
Interim fully franked dividend for the half-year ended 31 December 2013:
A$0.10 per share (2012: nil)
562131
(b) Dividends proposed and not recognised as a liability
Fully franked dividend: A$0.10 per share (2013: A$0.10 per share)
290282
290282
(c) Franking credits
At 30 June 2014, franking credits available were US$539 million (2013: US$652 million). The payment of the final dividend for
the year ended 30 June 2014 will reduce the franking account balance by US$124 million.
23 Remuneration of auditors
(a)PricewaterhouseCoopers
2014
US$000
2013
US$000
Audit and other assurance services
Audit and review of financial statements
774
668
Other assurance services
140
82
Total audit and assurance services
914
750
Other services
Consulting services705461
Total remuneration of PricewaterhouseCoopers Australia
1,619
1,211
Audit and review of financial statements
47
43
Total remuneration of network firms of PricewaterhouseCoopers Australia
47
43
(b) Network firms of PricewaterhouseCoopers Australia
Audit and other assurance services
(c) Other audit firms
72
Audit and other services
26
25
Audit and review of financial statements - BDO Wellington, New Zealand
26
25
Total auditors’ remuneration1,6921,279
24Contingencies
Fortescue had no material contingent liabilities or contingent assets at 30 June 2014 or at the date of this report. Fortescue
occasionally receives claims arising from its activities in the normal course of business. In the opinion of the Directors, all
such matters are covered by insurance or, if not covered, are without merit or are of such a kind or involve such amounts
that would not have a material adverse impact on the operating results or financial position if settled unfavourably.
25Commitments
Operating
Capital (i)leases (ii)Total
US$m
US$m
US$m
30 June 2013
Within one year
Between one and five years
Total
574
72
646
9
104
113
583176759
30 June 2014
Within one year
519
79
598
Between one and five years
252
176
428
Total
771 2551,026
25 Commitments (continued)
(i) At 30 June 2014 Fortescue had contractual commitments to capital expenditure not recognised as liabilities.
(ii)Fortescue leases various offices and other premises under non-cancellable operating leases expiring within one
to seven years. The leases have varying terms, escalation clauses and renewal rights. The terms of the leases are
renegotiated on renewal.
Fortescue also leases mobile equipment, plant and machinery and office equipment under non-cancellable operating
leases. The leases have varying terms.
26 Related party transactions
(a)Subsidiaries
Interests in subsidiaries are set out in note 27.
(b) Key management personnel remuneration
2014
US$m
2013
US$m
Short term employee benefits
6
8
10
9
1617
In addition to the above, Fortescue paid A$277,914 termination benefits to key management personnel during the
financial year (2013: A$45,532).
Detailed information about the remuneration received by each key management person is provided in the remuneration
report on pages 26 to 47.
(c) Transactions with other related parties
The following transactions occurred with the joint operations partners:
20142013
US$m
US$m
Revenue9691
Other income2212
Current receivables2019
(d) Guarantees issued
The Minderoo Group Pty Ltd (formerly The Metal Group Pty Ltd), an entity controlled by Andrew Forrest, has entered into
arrangements to provide financial assistance by way of guarantee to certain of Fortescue’s Executives to purchase the
Company’s shares. The arrangement, which constitutes a share-based payment transaction, has been measured with the
reference to the fair value of the benefit received by the Executives and is recognised as an expense on a straight-line basis
over a four-year vesting period, in line with the service conditions. The fair value was determined at grant date using a
Monte-Carlo simulation model. The total share-based payment expense in relation to the arrangement for the financial year
ended 30 June 2014 was US$985,499 (2013: US$985,499).
No other transactions have occurred with related parties other than subsidiaries, entities with joint control, Directors or key
management personnel as disclosed above.
73
27 Interests in other entities
74
(a) Material subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in
accordance with the accounting policy described in note 35(a):
Equity holding
Investment
Country of
Class of
2014 2013
2014
2013
Controlled entities
incorporationshares % % US$
US$
The Pilbara Infrastructure Pty Limited
Australia
Ordinary
100
100
1
1
FMG Pilbara Pty Limited
Australia
Ordinary
100
100
1
1
Chichester Metals Pty Limited
Australia
Ordinary
100
100
1
1
FMG Resources (August 2006) Pty Limited
Australia
Ordinary
100
100
1
1
Pilbara Mining Alliance Pty Limited
Australia
Ordinary
100
100
1
1
Karribi Developments Pty Limited
Australia
Ordinary
100
100
1
1
FMG Magnetite Pty Limited
Australia
Ordinary
88
88
1
1
FMG North Pilbara Pty Limited
Australia
Ordinary
88
88
1
1
FMG Pacific Limited
New Zealand
Ordinary
100
100
1
1
FMG International Pte Limited
Singapore
Ordinary
100
100
209,053
209,053
Pilbara Housing Services Pty Limited
Australia
Ordinary
100
100
1
1
FMG Solomon Pty Limited
Australia
Ordinary
100
100
1
1
Masters Way Homes Pty Limited
Australia
Ordinary
100
100
1
1
FMG Iron Bridge Limited
Hong Kong
Ordinary
88
88 43,557,023 43,557,023
FMG Iron Bridge (Aust) Pty Limited
Australia
Ordinary
88
88
108
108
FMG Air Pty Limited
Australia
Ordinary
100
100
1
1
FMG Capital Pty Limited
Australia
Ordinary
100
100
1
1
Glacier Valley Management Company Pty Limited
Australia
Ordinary
94
94
1
1
FMG Exploration Pty Limited
Australia
Ordinary
100
100
1
1
FMG Minerals Pty Limited
Australia
Ordinary
100
100
1
1
Pilbara Iron Ore Pty Limited
Australia
Ordinary
50
50
1
1
Fortescue Services Pty Limited
Australia
Ordinary
100
100
1
1
FMG Personnel Pty Limited
Australia
Ordinary
100
100
1
1
VTEC Services Pty Limited
Australia
Ordinary
100
100
1
1
FMG IOC Pty Limited
Australia
Ordinary
100
100
1
1
FMG Training Pty Limited
Australia
Ordinary
100
100
1
1
International Bulk Ports Pty Limited
Australia
Ordinary
100
100
1
1
FMG Resources Pty Limited
Australia
Ordinary
100
100
339
339
FMG America
USA
Ordinary
100
10011
FMG Nyidinghu Pty Ltd
Australia
Ordinary
100
100
1
1
Pilbara Power Pty Limited
Australia
Ordinary
100
100
1
1
Pilbara Ports Pty Limited
Australia
Ordinary
100
100
1
1
Pilbara Gas Pipeline Pty Limited
Australia
Ordinary
100
100
1
1
FMG JV Company Pty Limited
Australia
Ordinary
100
100
1
1
FMG Ashburton Pty Limited
Australia
Ordinary
100
100
1
1
African Fortescue, Limitada
Mozambique
Ordinary
100
100
1
1
FMG Procurement Services
Australia
Ordinary
100
-
1
FMG International Marketing Pte Ltd
Singapore
Ordinary
100
-
1
FMG Personnel Services Pty Ltd
Australia
Ordinary
100
-
1
SS IB Pty Ltd
Australia
Ordinary
88
-
1
GMF Insurance Limited
Guernsey
Ordinary
100
- 4,690,502
FMG Chichester Personnel Pty Ltd
Australia
Ordinary
100
-
1
FMG International Shipping Pte Ltd
Singapore
Ordinary
100
-
1
-
27 Interests in other entities (continued)
(b) Joint operations
Fortescue, through its wholly-owned subsidiary FMG Pilbara Pty Limited, holds a 25 per cent participating interest
in the Nullagine Iron Ore Joint Venture. The principal activity of Nullagine Iron Ore Joint Venture is the production of iron ore
in the Pilbara region of Western Australia, with Fortescue entitled to receive joint operation output consistent with its
participating interest.
In October 2013, Fortescue, through its 88 per cent owned subsidiaries FMG Magnetite Pty Ltd and FMG North Pilbara Pty Ltd,
formed the Iron Bridge Joint Venture and Glacier Valley Joint Venture to develop and produce its magnetite assets in the
Pilbara region of Western Australia. The Group is entitled to receive joint operation output consistent with its participating
interest of 69 per cent.
28 Deed of cross guarantee
Fortescue Metals Group Limited and certain of its subsidiaries are parties to a deed of cross guarantee under which each
company guarantees the debts of the others. By entering into the deed, the wholly-owned entities have been relieved from
the requirement to prepare a financial report and Directors’ report under Class Order 98/1418 (as amended) issued by the
Australian Securities and Investments Commission.
Holding entity
• Fortescue Metals Group Limited
75
Group entities
• FMG Pilbara Pty Limited
• Chichester Metals Pty Limited
• FMG Resources (August 2006) Pty Limited
• FMG Resources Pty Limited
• International Bulk Ports Pty Limited
• The Pilbara Infrastructure Pty Limited
• FMG Solomon Pty Limited
(a)Consolidated income statement, consolidated statement of comprehensive income, consolidated statement of
financial position and consolidated statement of changes in equity
The consolidated income statement, consolidated statement of comprehensive income and consolidated statement of
changes in equity for the year ended 30 June 2014 along with the consolidated statement of financial position as at
30 June 2014 for the closed group and the extended closed group represented by the above companies are materially the
same as that of the consolidated group.
29 Earnings per share
(a) Earnings per share
2014
Cents
2013
Cents
Basic88.00 56.07
Diluted87.85 56.05
29 Earnings per share (continued)
(b) Reconciliation of earnings used in calculating earnings per share
2014
US$m
2013
US$m
2,740
1,746
Profit attributable to the ordinary equity holders of the Company used in
calculating basic and diluted earnings per share
(c) Weighted average number of shares used as denominator
2014
Number
2013
Number
Weighted average number of ordinary shares used as the denominator in
calculating basic earnings per share3,113,798,151 3,113,784,294
Adjustments for calculation of diluted earnings per share:
Potential ordinary shares
5,133,166
1,443,267
Weighted average number of ordinary and potential ordinary shares used
as the denominator in calculating diluted earnings per share3,118,931,317 3,115,227,561
(d) Information on the classification of securities
76
(i) Options and rights
Options and rights granted to employees under the Fortescue incentive plan are considered to be potential ordinary shares
and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. Details
relating to the options and rights are set out in note 30.
30 Share-based payments
(a) Employee Option and Performance Rights Plans
During the financial year Fortescue issued 3,917,818 short term performance rights and 8,038,536 long term performance
rights to employees and senior executives, convertible to one ordinary share per right. The short term rights vest over one
year, and the long term rights vest over three years. Vesting of both the short term and the long term rights are subject to
non-market vesting conditions imposed on each individual participating in the performance rights plans.
Outstanding at 1 July
Weighted
average
exercise price
2014
A$
3.89
Number of
options
and rights
2014
Number
Weighted
average
exercise price
2013
A$
Number of
options
and rights
2013
Number
10,603,847
4.51
9,151,984
Performance rights granted
-
11,956,354
-
2,443,817
Performance rights forfeited or lapsed
-
(1,360,433)
-
(616,629)
Performance rights converted
-
(973,448)
-
(375,325)
Options forfeited
5.69
(400,000)
-
-
Options exercised 2.50
-
-
Outstanding at 30 June
1.95
(600,000)
19,226,320
3.8910,603,847
30 Share-based payments (continued)
The weighted average fair value of performance rights granted during the year ended 30 June 2014 was A$5.09 per right
(2013: A$3.87) for the short term performance rights and A$5.29 per right (2013: A$4.03) for the long term performance
rights. The estimated fair value was determined using a trinomial option pricing model that takes into account the exercise
price, the term of the option, the impact of dilution, the share price at grant date, expected price volatility of the underlying
share, the effect of additional market conditions, the expected dividend yield, estimated share conversion factor and the risk
free interest rate for the term of the right.
The weighted average inputs used to determine the fair value of performance rights granted during the year ended
30 June 2014 were:
(a) share price: A$5.35 (2013: A$4.07)
(b) exercise price: nil (2013: nil)
(c) volatility: 78 per cent (2013: 64 per cent)
(d) option life: 21 months (2013: 24 months)
(e) dividend yield: 2 per cent (2013: 2 per cent)
(f ) risk free interest rate: 2.5 per cent (2013: 3 per cent)
Details of options and performance rights outstanding at 30 June 2014 are presented in the following table:
Balance
Exercise
at the end
price
of the year
A$
Number
Employee options 2010
5.00
Vested and exercisable at
Remaining
the end
contractual
of the year
life
Number
Months
7,500,000 -10
Nil
2,935,785
-
18
Short term performance rights 2014
Nil
3,651,255
-
6
Nil
5,139,280
-
30
19,226,320
(b) Other share-based payments
The arrangement between certain of Fortescue’s Executives and The Minderoo Group Pty Ltd, as described in note 26,
constitutes a share-based payment. The assessed fair value of this share-based payment at grant date was US$3,941,996,
including US$985,499 expensed during the financial year (2013: US$985,499). The fair value at each grant date was
determined using a Monte-Carlo simulation model that takes into account the four-year life of the instruments, the share
prices at each grant date, the expected price volatility of the underlying share, the expected dividend yield risk free interest
rate for the life of the instruments, the loan value per share, the loan interest rate and the terms of the margin call.
(c) Employee expenses
Total expenses arising from share-based payments transactions recognised during the period as part of employee benefit
expense were as follows:
2014
2013
US$m US$m
31
14
77
31 Reconciliation of profit after income tax to net cash inflow from operating activities
2014
US$m
2013
US$m
Profit for the year after income tax2,7401,746
Income tax expense
1,173
720
965
463
Assets write-off2271
16
45
31
14
-
(34)
Net unrealised foreign exchange loss (gain) 34
(98)
Interest expense disclosed within financing activities
688
586
Interest income disclosed within investing activities
(21)
(33)
Gain on disposal of interest in joint venture
(109)
(124)
Loss on early redemption of borrowings and finance leases
53
-
Other non-cash items
(10)
(18)
1,123
364
Increase (decrease) in payables and provisions
250
(644)
(Decrease) increase in receivables
(302)
190
Increase in inventories
(405)
(244)
Working capital adjustments:
78
Increase in deferred income
Net cash inflow from operating activities6,2483,004
2014
2013
US$m US$m
Non-cash investing and financing activities
Acquisition of plant and equipment through finance leases
(9)
(223)
Other(42)26
Total non-cash financing and investing activities
(51)
(197)
32 Parent entity financial information
(a) Summary financial information
The individual financial statements for the parent entity show the following aggregate amounts:
2014
US$m
2013
US$m
Balance sheet
Current assets633657
Non-current assets8,5725,480
Total assets9,2056,137
Current liabilities
1,267
156
Non-current liabilities
94
568
Total liabilities
1,361
724
Net assets7,8445,413
Equity
Contributed equity1,2891,291
Reserves5621
Retained earnings6,4994,101
Total equity7,8445,413
Profit for the year(i)2,9601,690
Total comprehensive profit for the year
2,960
1,690
Profit for the year includes dividends received from subsidiaries of US$3,200 million (2013: US$1,600 million).
(b) Guarantees entered into by the parent entity
The parent entity has not provided any financial guarantees other than the cross guarantees, as described in note 28.
(i)
No liability was recognised by the parent entity or the consolidated entity in relation to the cross guarantees.
(c) Contingent liabilities of the parent entity
The parent entity did not have any contingent liabilities as at 30 June 2014 or 30 June 2013. For information about
guarantees given by the parent entity, please see above.
79
33 Events occurring after the reporting period
On 20 August 2014, the Directors declared a final dividend of 10 Australian cents per ordinary share payable on
3 October 2014.
On 20 August 2014, Fortescue announced its intention to redeem US$500 million of the 2018 senior unsecured notes
in October 2014.
34 Financial risk management
Fortescue has a risk management programme that provides a structured approach to the management of risks across the
business. The programme incorporates active management of financial risks arising from Fortescue’s activities to ensure
that such risks are maintained within tolerable levels as required by the Board of Directors. Financial risks include market
risk, credit risk and liquidity risk.
The Board of Directors, through the Audit and Risk Management Committee (ARMC), has ultimate responsibility for
oversight of the Fortescue Risk Management Framework (FRMF) and for setting appropriate risk tolerance levels. Day-to-day
management responsibility for execution of the FRMF has been delegated to the CEO and the CFO. Periodically the CFO
reports to the ARMC on risk management performance, including management of financial risks.
The key elements of financial risk are further explained below.
80
(a) Market risk
Market risk arises from Fortescue’s exposure to commodity price risk and the use of interest bearing and foreign currency
financial instruments. It is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates (foreign currency exchange risk), iron ore prices (commodity price risk) or interest rates
(interest rate risk).
(i) Foreign exchange risk
Fortescue operates internationally and is exposed to foreign exchange risk arising from various currency exposures,
primarily with respect to the Australian dollar and the Euro. Fortescue is exposed to currency risk on cash reserves, trade
and other receivables, borrowings, trade and other payables, derivatives held at fair value and other financial assets
and liabilities.
Fortescue’s policy is, where possible, to allow Group entities to settle liabilities denominated in their functional currency
with the cash generated from their own operations in that currency.
Fortescue’s exposure to foreign exchange risks is measured using sensitivity analysis and cash flow forecasting. Fortescue’s
risk management policy is to target specific levels at which to convert United States dollars to Australian dollars by entering
into either spot or short term forward exchange contracts and to hedge a portion of anticipated cash flows in relation to
the 155mtpa expansion program in Australian dollars. All of the projected cash flows related to the expansion program
qualified as highly probable forecast transactions for hedge accounting purposes.
34 Financial risk management (continued)
The carrying amounts of the Group’s financial assets and liabilities are primarily denominated in three currencies as
set out below:
30 June 2013
USD AUD EUROTotal
US$m US$m US$mUS$m
Financial assets
Other financial assets
Derivatives held at fair value
Total financial assets
1,497
660
1
2,158
145
223
1
369
-
6
-
6
12
-
-
12
1,654
889
2
2,545
Financial liabilities
Total financial liabilities
30 June 2014
12,224
467
-
12,691
380
816
2
1,198
12,604
1,283
2
13,889
USD AUD EUROTotal
US$m US$m US$mUS$m
Financial assets
Total financial assets
2,110
288
-
2,398
487
65
1
553
2,597
353
1
2,951
Financial liabilities
Total financial liabilities
9,548
619
10,167
9
-
9,557
822
-
1,441
831
-10,998
A change of five per cent in the Australian dollar against the currencies above at 30 June 2014 would have an impact
on pre-tax profit and loss of US$24 million (2013: US$108 million). This analysis assumes that all other variables,
in particular interest rates, remain constant.
(ii) Commodity price risk
The Group is exposed to commodity price risk through iron ore price movements. Fortescue had not entered into any
forward commodity price contracts at 30 June 2014 (2013: nil) and is currently fully exposed to commodity price movements
as follows:
2014
US$m
2013
US$m
Trade receivables486171
Derivative held at fair value
-
12
486183
A change of 15 per cent in commodity prices would have an impact on the Group’s pre-tax profit and loss of US$73 million
(2013: US$24 million). This analysis assumes that all other variables, in particular foreign exchange, remain constant.
81
(iii) Interest rate risk
It is Fortescue’s policy to reduce interest rate risk over the cash flows on its long term debt finance within tolerable levels set
by ARMC through the use of fixed rate instruments whenever appropriate.
Fortescue’s main interest rate risk arises from floating rates on the senior secured credit facility and changes in rates on
short term investments. The Group’s fixed rate borrowings are carried at amortised cost and are not subject to interest rate
risk as defined in AASB 7 Financial Instruments: Disclosures. Other financial instruments of the Group are non-interest bearing
and are also not subject to interest rate risk as defined in AASB 7.
At 30 June 2014, Fortescue had the following variable rate assets and liabilities:
2014
US$m
2013
US$m
Cash and cash equivalents2,3932,143
(4,795)
(4,828)
(2,402)(2,685)
Management analyses the Group’s interest rate exposure on a regular basis by simulation of various scenarios taking into
consideration refinancing, renewal of existing positions, alternative financing options and hedging.
82
A change of ten basis points in interest rates in variable instruments would have an impact on the Group’s pre-tax profit
and loss of US$3 million (2013: US$7 million). This analysis assumes that all other factors remain constant, including foreign
currency rates.
(b) Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to
Fortescue and is managed on a consolidated basis. Credit risk arises from cash and cash equivalents, derivative financial
instruments, deposits with banks and financial institutions and receivables from customers.
Fortescue is exposed to a concentration of risk with the majority of its iron ore customers being located in China. This risk
is mitigated by a policy of only trading with creditworthy counterparties and Fortescue further mitigates its credit risk
by obtaining security in the form of letters of credit covering approximately 95 per cent of the value of iron ore shipped.
Fortescue has not recognised any bad debt expense from trading counterparties in the financial years ended 30 June 2014
and 30 June 2013.
The exposure to the credit risk from cash and short term deposits held in banks is managed by the treasury department
and monitored by the Board of Directors. Fortescue minimises the credit risks by holding funds with a range of financial
institutions with the credit ratings approved by the Board.
The analysis of receivables past due is presented in note 10. Fortescue does not consider there to be any potential
impairment loss on these receivables.
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The Group
manages liquidity risk by maintaining adequate cash reserves and banking facilities, by continuously monitoring actual and
forecast cash flows and by matching the maturity profiles of financial assets and liabilities.
The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the period to the
contracted maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
Less
than 6
months
US$m
BetweenBetween Between
Total
6 and 12
1 and 2
2 and 5
Over 5 contractual Carrying
months
years
years
years
cash flows amount
US$m US$m
US$m
US$m US$m US$m
30 June 2013
Non-interest bearing
999
-
26
119
-
1,144
1,144
Fixed rate
345
301
606
6,003
3,933
11,188
7,917
6,072
4,828
Variable rate
Total
159
1,503
154
307
455
939
5,452
-
11,574
3,933
18,40413,889
30 June 2014
Non-interest bearing
Fixed rate
Variable rate
Total
1,376
-
55
-
-
1,431
1,431
187
177
355
2,786
3,485
6,990
4,772
5,885
4,795
119
1,682
117
234
294
644
737
4,678
3,523
8,163
14,30610,998
Management monitors rolling forecasts of the Group’s cash and overall liquidity position on the basis of expected cash flows.
(d) Fair values
All financial assets and financial liabilities, with the exception of derivatives, are initially recognised at the fair value of the
consideration paid or received, net of directly attributable transaction costs. Subsequently, the financial assets and financial
liabilities, other than derivatives, are measured at amortised cost. The carrying values of the financial assets and liabilities
approximate their fair values, with the exception of the senior unsecured notes and senior secured credit facility with the fair
values of US$4,690 million and US$4,925 million respectively. These fair values are based on quoted market prices at the end
of the reporting period and as such are classified as level 1 financial instruments in the fair value hierarchy.
(e) Capital management
Fortescue’s capital management policy provides a framework to maintain a strong capital structure to sustain the future
development and expansion of the business and to provide consistent returns to its equity shareholders.
The capital structure of the Group consists of net debt (borrowings and finance lease liabilities as detailed in note 17
offset by cash and bank balances) and the equity of the Group (comprising issued capital, reserves and retained earnings
as detailed in the statement of changes in equity).
Fortescue has built significant flexibility in its debt capital structure. This flexibility allows Fortescue to manage debt through
voluntary repayment or refinancing to extend maturity dates to match the Group’s long life assets.
The Group monitors capital using financial and non-financial indicators. Financial indicators include, but are not limited to,
gearing, interest coverage and leverage ratios.
Target ranges for ratios are provided dependent upon the investment and commodity cycle. During periods of intensive
investment, for example expansion programmes, or a commodity cycle downturn, the capital policy contemplates interim
ratio levels moving to a targeted longer term level. Interim levels acknowledge and consider the requirements, in certain
circumstances, for remedial action to be taken.
83
35 Summary of significant accounting policies
The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below.
(a) Principles of consolidation
(i)Subsidiaries
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the
Company. Control is achieved when the Company has the power to govern the financial and operating policies of the entity,
generally accompanying a shareholding of more than one half of the voting rights.
Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of
comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate.
The financial statements of subsidiaries are prepared for the same reporting period as the Company, using consistent
accounting policies. All intercompany balances and transactions, including unrealised profits and losses arising from intragroup transactions, have been eliminated in full.
The acquisition method of accounting is used to account for the Group’s business combinations.
Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement,
the consolidated statement of comprehensive income, statement of changes in equity and balance sheet respectively.
84
(ii) Joint arrangements
Joint arrangements exist when two or more parties have joint control. Joint control exists when the parties agree
contractually to share control over the activities that significantly affect the entity’s returns (relevant activities), and the
decisions about relevant activities require the unanimous consent of the parties sharing joint control.
Joint arrangements are classified as either joint operations or joint ventures, based on the contractual rights and obligations
between the parties to the arrangement.
Joint operations
If the contractual arrangement specifies the rights to the assets and the obligations for the liabilities for the parties, the
arrangement is classified as a joint operation. The Group recognises its direct right to the assets, liabilities, revenues and expenses
of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been
incorporated in the financial statements under the appropriate headings. Details of the joint operations are set out in note 27.
To support operations and construction projects of some of the joint operations, Fortescue and other parties to the joint
arrangements are required, from time to time, to contribute funds in the form of cash calls, in proportion to their respective
interests in the joint arrangements. These funds, if contributed by the joint venture parties in different financial years, may
give rise to deferred joint venture contribution assets or liabilities.
Joint ventures
If the contractual arrangement grants the parties the right to the arrangement’s net assets, it is classified as a joint venture.
Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost in the
consolidated balance sheet.
(b) Employee share trust
The Group has formed a trust to administer its employee share schemes. The trust is consolidated as the substance of the
relationship is that the trust is controlled by the Group. Shares held by the share trust are disclosed as treasury shares and
deducted from contributed equity.
(c) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating
decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance
of the operating segments, has been identified as the Chief Executive Officer.
35 Summary of significant accounting policies (continued)
(d) Foreign currency translation
(i) Transactions and balances
Transactions in foreign currencies have been converted at rates of exchange ruling at the date of those transactions. Foreign
exchange gains and losses resulting from the settlement of such transactions and from the year end translation of monetary
assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in
other comprehensive income as qualifying cash flow hedges. Translation differences on assets and liabilities carried at fair
value are reported as part of the fair value gain or loss.
(ii) Foreign operations
The results and financial position of foreign operations that have a functional currency different from the presentation
currency are translated into the presentation currency as follows:
•
assets and liabilities are translated at the closing foreign exchange rate at the date of the balance sheet;
•income and expense items are translated at average exchange rates for the periods presented (unless exchange rates
fluctuated significantly during the period, in which case the exchange rates at the dates of the transactions are used); and
•
all resulting exchange differences are recognised in other comprehensive income and accumulated in equity.
On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of
borrowings designated as hedges of the investment, are recognised in other comprehensive income. Should a foreign
operation be sold or any borrowings forming part of the net investment be repaid, a proportionate share of the exchange
difference is reclassified to profit or loss, as part of the gain or loss on sale where applicable.
(e) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Fortescue recognises revenue when the
amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity and
specific criteria have been met for each of the Group’s activities as described below.
(i) Sale of products
Revenue from the sale of products is recognised when persuasive evidence exists, usually in the form of an executed sales
agreement, indicating that there has been a transfer of risks and rewards of ownership to the customer, no further work
or processing is required by the Group, the quantity and quality of the products have been determined with reasonable
accuracy, the price can be reasonably estimated and collectibility is reasonably assured.
Fortescue recognises revenue from the sale of iron ore when the risks and rewards of ownership transfers to the buyer.
The sales price is determined on a provisional basis and adjustments to the sales price may subsequently occur depending
on movements in quoted market or contractual iron ore prices to the date of final pricing and final product specifications.
The date of final pricing is typically when a notice of readiness is received when the vessel has arrived at its final destination.
Revenue is recognised based on the estimated fair value of the total consideration receivable. The fair value of the final
consideration is re-estimated at each reporting date and any changes in the fair value are recognised as an adjustment
to revenue.
(ii) Services revenue
Revenue from the provision of services is recognised in the accounting period in which the services are rendered.
(iii) Interest income
Interest income is accrued using the effective interest rate method.
(f) Deferred income
Deferred income represents payments collected but not earned at the end of the reporting period. These payments are
recognised as revenue when the goods are delivered or services are provided.
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(g) Income tax
The income tax expense for the year is the tax payable on the current year’s taxable income based on the applicable income
tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences
and to unused tax losses.
The current income tax charge is calculated on the basis of the taxation laws enacted or substantively enacted at the end of
the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Management
periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulation is
subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the
taxation authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts. However, the deferred income tax is not accounted for if it arises from
the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the
transaction affects neither the accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and
laws that have been enacted or substantially enacted by the reporting date and are expected to apply when the related
deferred income tax asset is realised or the deferred income tax liability is settled.
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Deferred tax assets are recognised for future deductible temporary differences and carry forward of unused tax losses,
only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that
the related tax benefit will be realised.
Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amounts and tax
bases of investments in foreign operations where the Group is able to control the timing of the reversal of the temporary
differences and it is probable that the differences will not be reversed in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legal right to offset current tax assets and liabilities and when
the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the
Group has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.
Current and deferred tax is recognised in profit and loss, except to the extent that it relates to items recognised in other
comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or
directly in equity, respectively.
Fortescue Metals Group Limited and its wholly-owned Australian controlled entities have implemented the tax
consolidation legislation as of 1 July 2002, namely the FMG tax consolidated group, and are therefore taxed as a single
entity from that date.
In addition, FMG Iron Bridge (Aust) Pty Ltd and its wholly-owned Australian controlled entities have implemented the tax
consolidation legislation as of 28 September 2011, namely the FMG Iron Bridge tax consolidated group, and are therefore
taxed as a single entity from that date.
The head entity and the controlled entities in both tax consolidated groups continue to account for their own current and
deferred tax amounts. These tax amounts are measured as if each entity in each tax consolidated group continues to be a
standalone taxpayer in its own right.
In addition to its own current and deferred tax amounts, the head entity of each group also recognises the current
tax liabilities, or assets, and the deferred tax assets it has assumed from unused tax losses and unused tax credits from
controlled entities in the each corresponding tax consolidated group.
Assets or liabilities arising within the tax consolidated entities are recognised as amounts receivable from or payable to
other entities in the tax consolidated group. Any differences between the amounts assumed and amounts receivable or
payable under the tax funding agreement are recognised as a contribution to, or distribution from, wholly-owned tax
consolidated entities.
All the entities in the FMG tax consolidated group have entered into a valid and current tax sharing agreement which, in
the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of an income tax
obligation default by the head entity.
(h) Cash and cash equivalents
Cash and cash equivalents include cash on hand, short term deposits and other short term highly liquid investments that are
subject to an insignificant risk of changes in value, and are readily convertible to known amounts of cash.
(i) Trade receivables
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the
effective interest method, less provision for impairment. An allowance for impairment of trade receivables is established
when there is objective evidence that Fortescue will not be able to collect all amounts due.
Collectibility of trade receivables is reviewed on a monthly basis. When there is objective evidence that Fortescue will not
be able to collect all amounts due according to the original terms of the receivables, an allowance for impairment of trade
receivables is raised. Total receivables which are known to be uncollectible are written off by reducing the carrying amount
directly. Significant financial difficulties of the customer, probability that the customer will enter bankruptcy or financial
re-organisation and default or delinquency in payments are considered indicators that the trade receivable may not be
collected. The amount of the impairment allowance is the difference between the trade receivable carrying amount and the
present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short
term receivables are not discounted if the effect of discounting is immaterial.
The amount of the impairment allowance is recognised in profit and loss within other administration expenses. When a
trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period,
it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against
other administration expenses.
(j)Inventories
Warehouse stores and materials, work in progress and finished goods are stated at the lower of cost and net realisable value.
Costs for raw materials and stores are determined as the purchase price. For partly processed and saleable iron ore, cost is
based on the weighted average cost method and includes:
•labour costs, materials and contractor expenses which are directly attributable to the extraction and processing
of iron ore;
•
production overheads, including attributable mining and manufacturing overheads;
•the depreciation of mine development assets and of property, plant and equipment used in the extraction, processing
and transportation of iron ore; and
•transportation expenditure in bringing such inventories to their existing location and condition, together with an
appropriate portion of fixed and variable overhead expenditure.
Iron ore stockpiles represent iron ore that has been extracted and is available for further processing or sale. Quantities are
assessed primarily through internal and third party surveys. Where there is an indication that inventories are obsolete or
damaged, these inventories are written down to net realisable value. Net realisable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
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(k) Financial assets
Fortescue classifies its financial assets into loans, receivables and financial assets at fair value through profit or loss.
The classification depends on the purpose for which the financial assets were acquired. Management determines the
classification of its financial assets at initial recognition.
(i) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market and include trade receivables. They are included in current assets, except for those with maturities greater
than 12 months after the reporting date which are classified as non-current assets.
(ii) Financial assets through profit or loss
This category comprises only derivative financial instruments. They are carried in the balance sheet at fair value with
changes in fair value recognised in profit or loss.
(l) Financial liabilities
(i) Trade payables
Trade and other payables are initially recognised at fair value and subsequently carried at amortised cost and represent
liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when
the Group has an obligation to make future payments in respect of the purchase of these goods and services.
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(ii) Borrowings
Borrowings are initially recognised at fair value of the consideration received, less directly attributable transaction costs.
After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method.
Gains and losses are recognised in profit or loss when the liabilities are derecognised.
(iii) Finance lease liabilities
The Group has finance lease liabilities in relation to certain items of property, plant and equipment. Finance lease liabilities
are initially recognised at the fair value of the underlying assets or, if lower, the estimated present value of the minimum lease
payments. Each lease payment is allocated between the liability and finance cost and the finance cost is charged to profit and
loss over the lease period to reflect a constant periodic rate of interest on the remaining balance of the liability for each period.
(m) Derivatives and hedge accounting
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently
remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value
depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.
The Group designates certain derivatives as hedges of foreign exchange risk associated with the cash flows of highly
probable forecast transactions.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges
is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the
ineffective portion is immediately recognised in profit or loss within other income or other expense.
The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging
transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.
When the forecast transaction that is being hedged results in the recognition of a non-financial asset, the gains and losses
previously deferred in other comprehensive income are transferred from equity and adjust the cost of the asset.
When a hedging instrument expires, is sold or terminated, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in equity is recognised when the forecast transaction is ultimately
recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was
reported in equity is immediately reclassified to profit or loss.
(n) Property, plant and equipment
(i) Recognition and measurement
Each class of property, plant and equipment is stated at historical cost less, where applicable, any accumulated depreciation
and impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the assets.
The cost of self-constructed assets includes the cost of materials and direct labour and any other costs directly attributable
to bringing an asset to a working condition ready for its intended use. Assets under construction are recognised in assets
under development. Upon commissioning, which is the date when the asset is in the location and condition necessary for
it to be capable of operating in the manner intended by management, the assets are transferred into property, plant and
equipment or development assets, as appropriate.
Cost may also include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of
property, plant and equipment. Borrowing costs related to the acquisition or construction of qualifying assets are capitalised.
When separate parts of an item of property, plant and equipment have different useful lives, they are accounted for as
separate items of property, plant and equipment. Borrowing costs related to the acquisition or construction of qualifying
assets are capitalised. When separate parts of an item of property, plant and equipment have different useful lives, they are
accounted for as separate items of property, plant and equipment. Purchased software that is integral to the functionality of
the related equipment is capitalised as part of the equipment.
Gains and losses arising on disposal of property, plant and equipment are recognised in profit or loss and determined by
comparing proceeds from the sale of the assets to their carrying amount.
(ii) Subsequent costs
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it
is probable that future economic benefits associated with these subsequent costs will flow to Fortescue and the cost of the
item can be measured reliably. Ongoing repairs and maintenance are recognised as an expense in profit and loss during the
financial period in which they are incurred.
(iii)Depreciation
Depreciation on assets, other than land which is not depreciated, is calculated using the straight-line method or units of
production method, net of residual values, over estimated useful lives. Depreciation commences on the date when an asset
is available for use, that is, when it is in the location and condition necessary for it to be capable of operating in the manner
intended by management. Assets acquired under finance leases are depreciated over the shorter of the individual asset’s
useful life and the lease term.
Straight-line method
Where the useful life is not linked to the quantities of iron ore produced, assets are generally depreciated on a straight-line
basis over the estimated useful lives of the assets as follows:
•
Buildings
20 – 25 years
•
Rolling stock
25 – 30 years
•
Plant and equipment
5 – 20 years
•
Furniture, fittings and equipment
3 – 8 years
•
Rail and port infrastructure assets
40 – 50 years
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period with
the effect of any changes in estimate accounted for on a prospective basis.
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Units of production method
Where the useful life of an asset is directly linked to the extraction of iron ore from a mine, the asset is depreciated using the
units of production method. The units of production method is an amortised charge proportional to the depletion of the
estimated proven and probable reserves at the mine.
(iv) Exploration, evaluation and development expenditure
Exploration and evaluation activities involve the search for mineral resources, the determination of technical feasibility
and the assessment of commercial viability of an identified resource. Exploration and evaluation expenditure incurred is
accumulated in respect of each identifiable area of interest.
Exploration and evaluation expenditure is capitalised and carried forward to the extent that:
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•
rights to tenure of the identifiable area of interest are current; and
•
at least one of the following conditions is also met:
(i)the expenditure is expected to be recouped through the successful development of the identifiable area of
interest, or alternatively, by its sale; or
(ii)where activities in the identifiable area of interest have not, at the reporting date, reached a stage that
permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and
activities in, or in relation to, the area of interest, are continuing.
Exploration and evaluation assets are reviewed at each reporting date for indicators of impairment and tested for
impairment where such indicators exist. If the test indicates that the carrying value might not be recoverable, the asset is
written down to its recoverable amount. These charges are recognised as impairment expense in profit and loss.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its
recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that
would have been determined had no impairment loss been recognised for the asset in previous years.
Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are
demonstrable, exploration and evaluation assets attributable to that area of interest are first tested for impairment and then
reclassified from exploration and evaluation expenditure to development expenditure.
Development expenditure includes capitalised exploration and evaluation costs, pre-production development costs,
development studies and other expenditure pertaining to that area of interest. Costs related to surface plant and
equipment and any associated land and buildings are accounted for as property, plant and equipment.
Development costs are accumulated in respect of each separate area of interest. Costs associated with commissioning
new assets in the period before they are capable of operating in the manner intended by management, are capitalised.
Development costs incurred after the commencement of production are capitalised to the extent they are expected to give
rise to a future economic benefit.
When an area of interest is abandoned or the Directors decide that it is not commercially or technically feasible, any
accumulated cost in respect of that area is written off in the financial period that decision is made. Each area of interest is
reviewed at the end of each accounting period and the accumulated costs written off to profit and loss to the extent that
they will not be recoverable in the future.
Amortisation of development costs capitalised is charged on a unit of production basis over the life of estimated proven
and probable reserves at the mine.
(o) Stripping costs
(i) Development stripping costs
Overburden and other mine waste materials are often removed during the initial development of a mine in order to access
the mineral deposit. This activity is referred to as development stripping and the directly attributable costs, inclusive of an
allocation of relevant overhead expenditure, are capitalised as development costs. Capitalisation of development stripping
costs ceases and amortisation of those capitalised costs commences upon commercial extraction of ore. Amortisation of
capitalised development stripping costs is determined on a unit of production basis for each area of interest.
Development stripping costs are considered in combination with other assets of an operation for the purpose of
undertaking impairment assessments.
(ii) Production stripping costs
Overburden and other mine waste materials continue to be removed throughout the production phase of the mine. This
activity is referred to as production stripping, with the associated costs charged to the income statement, as operating cost,
except when all three criteria below are met:
• production stripping activity provides improved access to the specific component of the ore body, and it is probable
that economic benefit arising from the improved access will be realised in future periods;
•
the Group can identify the component of the ore body for which access has been improved; and
•
the costs relating to the production stripping activity associated with that component can be measured reliably.
If all of the above criteria are met, production stripping costs resulting in improved access to the identified component of
the ore body are capitalised as part of development asset and are amortised over the life of the component of the ore body.
The determination of components of the ore body is individual for each mine. The allocation of costs between production
stripping activity and the costs of ore produced is performed using relevant production measures, typically strip ratios.
Changes to the mine design, technical and economic parameters affecting life of the components and strip ratios, are
accounted for prospectively.
(p)Leases
Leases of assets where Fortescue, as lessee, has substantially all the risks and rewards of ownership, are classified as finance
leases. Assets acquired under finance leases are capitalised at the lower of the fair value of the underlying assets or the
present value of the future minimum lease payments. The corresponding finance lease liability is classified as borrowings.
Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the profit or loss over
the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Leases in which a significant portion of the risks and rewards of ownership are not transferred to Fortescue as lessee are
classified as operating leases. Payments made under operating leases are recognised as an expense in profit and loss on a
straight-line basis over the period of the lease.
(q) Rehabilitation provision
Provisions are recognised when Fortescue has a present legal or constructive obligation as a result of past events, it is
more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably
estimated.
The mining, extraction and processing activities of Fortescue give rise to obligations for site rehabilitation. Rehabilitation
obligations can include facility decommissioning and dismantling, removal or treatment of waste materials, land
rehabilitation and site restoration. The extent of work required and the associated costs are estimated using current
restoration standards and techniques. Provisions for the cost of each rehabilitation program are recognised at the time that
environmental disturbance occurs.
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Rehabilitation provisions are initially measured at the expected value of future cash flows required to rehabilitate the
relevant site, discounted to their present value using Australian Government bond market yields that match, as closely as
possible, the timing of the estimated future cash outflows. The judgements and estimates applied for the estimation of the
rehabilitation provisions are discussed in note 36.
When provisions for closure and rehabilitation are initially recognised, the corresponding cost is capitalised into the cost
of mine development assets, representing part of the cost of acquiring the future economic benefits of the operation. The
capitalised cost of closure and rehabilitation activities is recognised within development assets and is amortised based on
the units of production method over the life of the mine. The value of the provision is progressively increased over time as
the effect of discounting unwinds, creating an expense recognised in finance costs.
At each reporting date the rehabilitation liability is re-measured to account for any new disturbance, updated cost
estimates, inflation, changes to the estimated reserves and lives of operations, new regulatory requirements, environmental
policies and revised discount rates. Changes to the rehabilitation liability are added to or deducted from the related
rehabilitation asset and amortised accordingly.
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(r) Impairment of non-financial assets
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. The Group conducts an internal review of asset values bi-annually, which is used as a source of information
to assess for any indications of impairment. External factors, such as changes in expected future prices, costs and other
market factors are also monitored to assess for indications of impairment. If any such indication exists, an estimate of the
asset’s recoverable amount is calculated, being the higher of fair value less direct costs to sell and the asset’s value in use. An
impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction
between knowledgeable and willing parties. Fair value for mineral assets is generally determined using independent
market assumptions to calculate the present value of the estimated future cash flows expected to arise from the continued
use of the asset, including any expansion prospects, and its eventual disposal. These cash flows are discounted using an
appropriate discount rate to arrive at a net present value of the asset.
Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued
use of the asset in its present form and its eventual disposal, discounted using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash
flows have not been adjusted. Value in use is determined by applying assumptions specific to the Group’s continued use
and does not take into account future development.
In testing for indications of impairment and performing impairment calculations, assets are considered as collective groups
and referred to as cash generating units. Cash generating units are the smallest identifiable groups of assets and liabilities
that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Impaired assets are reviewed for possible reversal of the impairment at each reporting date.
(s) Intangible assets
Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute
to future period financial benefits through revenue generation or cost reduction are capitalised as software.
Costs capitalised include external direct costs of materials and consultants services, direct payroll and payroll related costs
of employees’ time spent on the project.
IT development costs include only those costs directly attributable to the development phase and are only recognised
following completion of technical feasibility and where Fortescue has an intention and ability to use the asset.
Intangible assets are amortised on a straight-line basis over periods generally ranging from 3 to 5 years.
(t) Finance costs
Finance costs comprise interest expense, excluding interest expenses incurred for the construction of qualifying assets,
which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, unwinding of
the discount on provisions and impairment losses recognised on financial assets.
Interest expense and other borrowing costs directly attributable to the acquisition, construction or production of qualifying
assets are added to the cost of those assets until such time as the assets are substantially ready for their intended use or
sale. Where funds used to finance an asset form part of general borrowings, the amount capitalised is calculated using a
weighted average of rates applicable to relevant general borrowings during the construction period.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying
assets is deducted from the borrowing costs eligible for capitalisation.
(u) Trade and other payables
These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which
are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are
presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised
initially at their fair value and subsequently measured at amortised cost using the effective interest method.
(v) Employee benefits
(i) Wages and salaries and annual leave
Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within
12 months of the reporting date are recognised in other payables and accruals in respect of employee services up to the
reporting date. They are measured at the amounts expected to be paid when the liabilities are settled.
(ii) Long service leave
The liability for long service leave is recognised in provisions and measured as the present value of expected future
payments to be made in respect of services provided by employees up to the reporting date. Consideration is given
to expected future wage and salary levels, probability of employee departures and periods of service. Expected future
payments are discounted using market yields at the reporting date on Australian Government bonds with terms to maturity
and currency that match, as closely as possible, the estimated future cash outflows.
The liability for long service leave for which settlement within 12 months of the reporting date cannot be deferred is
recognised in the current provision for employee benefits. The liability for long service leave for which settlement can be
deferred beyond 12 months from the reporting date is recognised in the non-current provision for employee benefits.
(w) Share-based payments
Share-based remuneration benefits are primarily provided to employees via the Fortescue Metals Group Incentive Option
Scheme (FMGIOS) and Performance Rights Plan (PRP). Information relating to these schemes is set out in note 30.
The fair value of options granted under the FMGIOS and PRP are recognised as an employee benefit expense with
a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which
the employees become unconditionally entitled to the options or rights.
The fair value at grant date is independently determined using trinomial option pricing model that takes into account the
exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the
underlying share, the effect of additional market conditions, the expected dividend yield and the risk free interest rate for
the term of the option or right.
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The fair value of the options and rights granted is measured to reflect expected market vesting conditions, but excludes
the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting
conditions are included in assumptions about the number of options that are expected to become exercisable. At each
reporting date, the entity revises its estimate of the number of options that are expected to become exercisable.
The employee benefit expense recognised each period takes into account the most recent estimate. The impact of the
revision to original estimates, if any, is recognised in profit and loss with a corresponding adjustment to equity.
(x)Dividends
Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion
of the Company, on or before the end of the reporting period but not distributed at the end of the reporting period.
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(y) Earnings per share
(i) Basic earnings per share
Basic earnings per share is calculated by dividing profit for the year after income tax attributable to the ordinary
shareholders by the weighted average number of ordinary shares on issue during the financial year.
(ii) Diluted earnings per share
Diluted earnings per share is calculated by dividing profit for the year after income tax attributable to the ordinary
shareholders by the weighted average number of ordinary shares on issue during the financial year, after adjusting for the
effects of all potential dilutive ordinary shares that were outstanding during the financial year.
(z) Goods and Services Tax (GST)
Revenues, expenses and assets are recognised net of the amount of associated GST, except where the amount of GST
incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the GST is recognised as part
of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet
are shown inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or
liability in the balance sheet.
Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and
financing activities, which is disclosed as an operating cash flow.
(aa)Comparatives
Where applicable, certain comparatives have been adjusted to conform with current year presentation.
(ab)New accounting standards and interpretations
(i) New and amended standards adopted by the Group
The following new standards and amendments to standards are mandatory for the first time for the financial year beginning
1 July 2013:
• AASB 10 Consolidated Financial Statements. AASB 10 introduces certain changes to the consolidation principles,
including the concept of de facto control and changes in relation to special purpose entities. The adoption of AASB 10
had no impact on the amounts recognised in Fortescue’s financial statements.
• AASB 11 Joint Arrangements. AASB 11 changes the classification and accounting for joint arrangements based on the
specified rights and obligations of the agreement. Fortescue has determined that its interests in joint arrangements
were not affected by the adoption of the new standard.
• AASB 12 Disclosure of Interests in Other Entities. AASB 12 sets out the required disclosures for entities reporting under
AASB 10 and AASB 11. The required disclosure of the new standard is included in note 27 Interests in Other Entities.
• AASB 13 Fair Value Measurement. AASB 13 establishes a single framework for measuring fair value of financial and nonfinancial items recognised at fair value. Fortescue does not have any significant assets or liabilities recorded at fair value
at 30 June 2014, therefore this standard has not impacted on the current year financial statements.
• IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine. IFRIC 20 addresses the accounting for deferred
stripping costs and requires the capitalisation of the component of waste removal costs that provides an improved
access to the ore body. Fortescue has determined that, given the nature of its iron ore reserves and extraction methods
used, the benefits from stripping activity during its production stage predominantly relate to the inventory produced.
No adjustments to any of the carrying amounts in the financial statements are required as a result of the adoption of
Interpretation 20.
• AASB 124 Related Party Disclosures. AASB 124 removes certain individual key management personnel disclosure
requirements and have no impact on the amounts recognised in the financial statements.
• AASB 2011-4 Amendments to Australian Accounting Standards. AASB 2011-4 removes the individual key management
personnel disclosure requirements from the financial statements to the Directors’ report.
(ii) New accounting standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2014
reporting periods. These standards and interpretations have not been early adopted.
• AASB 9 Financial Instruments and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9
and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective for
annual reporting periods beginning on or after 1 January 2015). AASB 9 addresses the classification, measurement and
derecognition of financial assets and financial liabilities. Fortescue has determined that AASB 9 will have no material
impact on the way the Group accounts for its financial instruments.
36 Critical accounting estimates and judgements
The preparation of the consolidated financial statements requires management to make judgements and estimates and
form assumptions that affect how certain assets, liabilities, revenue, expenses and equity are reported. At each reporting
period, management evaluates its judgements and estimates based on historical experience and on other factors it believes
to be reasonable under the circumstances, the results of which form the basis of the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
and conditions.
Fortescue has identified the following critical accounting policies where significant judgements and estimates are made by
management in the preparation of these financial statements.
(i) Income taxes
The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is
required in determining the provisions for income taxes. There are certain transactions and calculations undertaken during
the ordinary course of business for which the ultimate tax determination may be subject to change. Fortescue estimates its
tax liabilities based on the Group’s understanding of the tax law at the time. Where the final tax outcome of these matters
is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax
assets and liabilities in the period in which such determination is made.
Fortescue recognises deferred tax assets relating to carried forward tax losses to the extent they can be utilised. The
utilisation of the tax losses depends on the ability of the entities to generate sufficient future taxable profits.
95
36 Critical accounting estimates and judgements (continued)
(ii) Iron ore reserve estimates
Iron ore reserves are estimates of the amount of product that can be economically and legally extracted from Fortescue’s
current mining tenements. In order to calculate ore reserves, estimates and assumptions are required about a range of
geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production
costs, transport costs, commodity demand, commodity prices and exchange rates. Estimating the quantity and grade of ore
reserves requires the size, shape and depth of ore bodies or fields to be determined by analysing geological data such as
drilling samples. This requires complex and difficult geological judgements and calculations to interpret the data.
As economic assumptions used to estimate reserves change and as additional geological data is generated during the
course of operations, estimates of reserves may vary from period to period. Changes in reported reserves may affect
Fortescue’s financial results and financial position in a number of ways, including the following:
•
asset carrying values may be affected due to changes in estimated future cash flows;
•depreciation and amortisation charges in profit and loss may change where such charges are determined by the units
of production basis, or where the useful economic lives of assets change; and
96
• the carrying value of deferred tax assets may change due to changes in estimates of the likely recovery of tax benefits.
(iii) Exploration and evaluation expenditure
Fortescue’s accounting policy for exploration and evaluation expenditure results in expenditure being capitalised for an
area of interest where it is considered likely to be recoverable by future exploitation or sale or where the activities have
not reached a stage which permits a reasonable assessment of the existence of reserves. This policy requires management
to make certain estimates as to future events and circumstances, in particular whether an economically viable extraction
operation can be established. Any such estimates and assumptions may change as new information becomes available. If,
after having capitalised the expenditure under the policy, a judgement is made that recovery of the expenditure is unlikely,
the relevant capitalised amount will be written off to profit and loss.
(iv) Development expenditure
Development activities commence after commercial viability and technical feasibility of the project is established.
Judgement is applied by management in determining when a project is commercially viable and technically feasible. In
exercising this judgement, management is required to make certain estimates and assumptions as to the future events. If,
after having commenced the development activity, a judgement is made that a development asset is impaired, the relevant
capitalised amount will be written off to profit and loss.
(v) Property, plant and equipment – recoverable amount
The determination of fair value and value in use requires management to make estimates about expected production and
sales volumes, commodity prices, reserves (see ‘iron ore reserve estimates’ above), operating costs, rehabilitation costs
and future capital expenditure. Changes in circumstances may alter these projections, which may impact the recoverable
amount of the assets. In such circumstances, some or all of the carrying value of the assets may be impaired and the
impairment would be charged to profit and loss.
(vi) Rehabilitation estimates
Fortescue’s accounting policy for the recognition of rehabilitation provisions requires significant estimates including
the magnitude of possible works required for the removal of infrastructure and of rehabilitation works, future cost of
performing the work, the inflation and discount rates and the timing of cash flows. These uncertainties may result in future
actual expenditure differing from the amounts currently provided.
THE PATHWAY FROM
CONSTRUCTION TO PRODUCTION
2003
The dream begins
2004
Cloudbreak identified
2005
S&P/ASX 200 index
2006
Port Hedland
groundbreaking
2009
27 million tonnes shipped
2010
Christmas Creek expanded
2011
Solomon construction begins
2012
57.5mt shipped
2013
Firetail opened at Solomon
2013
80.9mt shipped
2014
155mtpa sustainable
production
2008
First ore on ship
2014
Kings Valley mine
opened at Solomon
2014 ANNUAL REPORT
ABN: 57 002 594 872
www.fmgl.com.au
@FortescueNews

2014 - Fortescue Metals Group

Transcription

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